e-.-vi^^Ij,;" 



!^ "' 














^mt 



-*«« •%-■■- J>& 







Class tiF5fe?Sh 

Book . C^Nz 

Gpiglit'N? 

COKRIGHT DEPOSIT. 



COST ACCOUNTS 



GEORGE HILLIS NEWLOVE, PH.D., C.P.A. (ill no 
// 

Resident Auditor, Income Tax Unit, Bureau of Internal Revenue; Dean, 

Washington School of Accountancy; Lecturer, Graduate School of 

Business Administration, American University; Member National 

Association of Cost Accountants; Charter Member^-. American 

Society of Certified Public Accountants; Member, American 

Association of University Instructors of Accounting; 

Author, C.P.A. Accounting (three volumes); Co- 

Aathor, Specialized Accounting (two volumes). 



PRELIMINARY EDITION 



THE WHITE PRESS COMPANY 

WASHII^GTON, D* C. 

1922 






o^^^ 

^^J^ 



SEP !8 1922 



^CI.A«8 1828 



I 



^ 



Copyright, 192E, by 
George Hillis Newlove 



Printed by 
Norris Peters, Inc., Washington, D. G, 



preface . 

The subject of oost aocounting i.s now. taugiit 
in Gollegea and sohools as a oourse of (a) two 
semeater-hours , '.( "b) three semester-hours, or (cj 
six semester-hours.. 

This volume is designed to be the only text 
used in a oourse of two semester-hours. Each 
chapter requires about one-half hour's study to 
master, and the problems about .three and. one-half 
hours' work to solve. The problems, each of 
which should be solved after studying the chapter 
of corresponding number, have been arranged so 
that only a few new accounting points are intro- 
duced at once, €ind then only after they have been 
discussed in the text.' Complete .solutions to the 
problems can be obtained from the' publisher by 
instructors using the volume. 

The table of suggested readi ngs given belt)W,- 
which requ.ires about two hours per assignment to 
master, has been prepared for the purpose of a- ' 
dapting tnis volume for use in 'a course of three .. 
semester-hours. 

For a co.urse. of six semester-hours this volume 
may be used either as the only text for the first 
half of the course and another text on advanced ■ 
cost acco unti ng used for the second half., or it 
may be used as a manual in conjunction with the 
use of the advanced text.. The order of contents 
of 'this volume agrees quite closely with that ,of 
most advanced cost accounting texts. 

This volume is not a contribution to the v'sci - 
ence of cost acco unti ng' but is simply a text book. 
It is prepared in the belief that as most students 
know but little about factories, it is sound peda- 
.gogy to introduce the subject of co st accounting 
to accounting stuaents by emphasizing the accoimts 
involved and by m.erely outlining the managerial 
and ' atati sti Ga^ aspects of the s^abj ect and the. cost 



problems of the specif io industries. The need of 
emphasizing the accounting aspects of cost account- 
ing is accentuated "by the fapt that in most curric- 
ula, courses in .factory management, business stat- 
istics and specialized .accounti ng follow the. co^orse 
in cost accounti rig. 

The undersigned \vishes to acknowledge the coop- 
Irati.on of the students in the five classes in cost 
accounting he has taught in the Washington School 
of Accountancy.- Ee wishes especially to express 
his appreciation of the helpful suggestions of Mr. 
James 3 . Ball,, M. C. S., C. P. A., and Mr. Charles W. 
Smith, 3.. G. S., and of the editorial assistance of 
Miss Margaret E. Batson, M.. G. S. Any suggestions 
for improving "this temporary edition will be grate- 
fully received, 

G, H. Newlpve 



COLLA!CERAL READING 



No. 1 Cost Accoimting; Nicholson (J, Lee) and 
Rohrbaeh (John F.). Ronald Press, 
1919, 

No. 2 Business Costs; Eggleston (Dewitt C.) 
and Rol3in3on (F, B.)« D. Appleton 
and Company, 1921. 

No. 3 Cost Aoeoimting, Principles and Prac- 
tice; Jordan (John P.) and Harris 
(Gould L.). Romld Press. 1921. 

No 4 Business Accounting, Volume III, Cost 
Accounting; Eggleston (Dewitt C). 
Ro2iald Press, 1920. 

No. 5 Essentials of Industrial Costing; Arm- 
strong (George So). D. Appleton 

and Company, 1921. 

No. 6 Manufacturing Costs and Accounts; Church 
(A. Hamilton). Mc Graw-Hill Book 
Company, Inc., 1917. 



Chapter 


No. 1 


No. 2 


No. 3 


No. 4. 


No. 5 


No. 6 


1 


4-5, 10, 


20-24, 455 


20-24 


3-5, 16-25 






II 




40-54 


i9-53, 240- 
245 






16, 23, ^&, 
30, 35 


111 


308-314, 
323-329 


390-394 




73-79, 106^ 
111 






lY 


55-61 




72-80 


31-33, 55- 
62 




255-271 


V 


66-70, 74- 
76, 233 


99-104, 115, 
133, 144- 
146 


97-98, 102- 
103, 111, 
126-129, 
133-135 


116, 124-130 






^I 


82-54, 86, 
• 91-94 


95-97, 133- 
134, 137, 

141-142 


102, 104, 
135-136, 
139, 151- 
153 


34, llS-121, 
133-134, 
136-139, 
143 


92-97 


166 


VII 


108-109, 
115-116, 
259-255 


241-245 


184, 186, 
202-205 


35-36, 175- 
179, 187, 
191 


129-143 


218 


VIII 


135-135, 
151 


274-277, 
279, 291- 
294, 311- 
314, 319 


229-231 


98-101, 
211-216, 
244-246 


51-53 


195 


IX 


166-168, 
170-173, 
178- 


331-336 


420-426 


273-280 , 
282, 






X 


177 


337-340 


221-228, 
247-248 


287, 298, 
301-303, 
308-318 






XI 


198-200, 
215, 308-' 
30S, 318- 
320, 388 


49, 83-89, 
373-378 


344-350 


38-40 


98-102 


93-95 


XII 


234^-235, 
278, 280- 
281, 283., 
323-324, 
389 


151-162, 
380-382 


251, 358- 
359 


391-392 


35-38, 
102-103 


86-93, 
435-447 


XIII 


55-40, 216. 


370-372, 
469-%§4 


81-94 




259-263 


384 


IVf 


1^*440 


317 


429-434, 
442-443 


241-242. 


179-184 


210 


m 


2a-224, 
459-462 , 
464, 475- 
480 


510-512 




63-65, 
34S-353 






IVl 




201, 513- 
526 


58-70 


354-362 







TABLE 0? CONTENTS 

CHAPTER I - INTRODUCTION 1 

Cost Accounting - Defined, Compared with Cost 
Finding, Relation to General Ac go un ting. 
Factory Management, Specialized Accounting, 
Constiuctive Accounting, Business Statistics, 
Advantages and Disadvantages; Kinds of Costs; 
No'n-cost Books. 

GEAPT.ER II - COST AND NON-COST SYSTEMS COM- 
PARED ...9 

Cost Books - Those Same as Non-cost Books, 
Books Slightly Changed, Books Not Used in 
Non-cost Systems; Chart;. Accounts in Cost 
and Non-cost Systems Compared. 

CHAPTER III - GENERAL AND FACTORY BOOi^S 18 

General Office Books - Books Outlined in 
Chapters I and II Not Used, Books not Out- 
lined in Chapters I and II Used, Books Same 
as Outlined in Chapters I and II, Books 
Slightly Changed, Books Greatly Changed; 
Factory Office Books ^ Books Same as Out- 
lined in Chapter II, Books Changed Greatly; 
Chart; General and Facto ry Ledger Accounts 
Compared. 

CHAPTER lY - FACTORY PRODUCTION ORDERS 24 

Kinds of Orders - Orders for Product, Con- 
struction, Betterments, Repairs; Forms of 
Production Orders ;. Authorizati on of Orders; 
Scheduling of Orders; Copies of Orders; Ac- 
counting Use of Orders - Under Product and 
Special Order Systems ;. Sub-production Orders. 

CHAPTER V - PURCHASING MD RECEIVING 

MATERIAL . . . ... . . ■ 31 

Purchase Requisitions; Purchasing Department; 
Receiving Department; Inspection Depart- 



ment; Stores Department; Aocounting Depart- 
. ment; Special Material. 

CHAPTEH VI - ISSUllTG AND PRICING RAW MATER- 
IAL 3? 

Material Requisitions; Material Abstracts; 
Material Credit Memos; Returned Purchases 
Memos; Materia] Costs; Pricj ng Mate ri al Is^ 
sued; Damaged Material; Yeri li cation of In- 
ventories; Valuation of Inventories. 

CHAPTER VII - LABOR. 46 

Employment Department; Classification of I^-b- 
or; Proration of Labor; Time Tickets; Wages 
Abstracts: Payroll; Accrued Payroll; Wage 
Systems. 

CHAPTER VIII - OVERHEAD .53 

Allocation of Expenses'; Service Departments; 
Depreciation; Repairs; Factory Supplies; 
Tools; Patterns, Lasts, Models; Prepaid 
Charges;' AGcru.ed Charges; Manufacturing Ex- 
pense Account; Reserve for Interest. 

CHAPTER IX - DISTRIBUTION OF OVERHEAD 61 

Importance of Choice of Method; Material Cost 
Method; Labor Cost Method; Prime Cost Meth- 
od; Labor Hour Method; Sold Hour Method; 
Units of Product Method; Machine Hour Meth- 
od; Combination of Methods. 

CHAPTER X - BLT)CETAKY CONTROL OP OVERHEAD ... ,68 
Budgets; Goods in Process-Factory Expense Ac- 
count; Manufacturing Expense Account; Jour- 
nalization of Budgets; Fixed Machine Rate; 
Supplementary Rate for Idle Time. 

CHAPTER XI - GOODS IN PROCESS 74 

Controlling Account; Cost Sheets; Finished 
Goods Production Reports; Inventories; Com- 
ponent Parts; By-Products. 



CHAPTER XII - FINISHED GOODS 82 

Division of Funoti ons; Sales Order; Shipping 
Order; Sales Invoice; Finished Goods Ledger; 
Inventories; Controlling Aaoount; Inspect- 
ing Department; Defective Work; Cost Statis- 
tics . 

CHAPTER XIII - PRODUCT COST SYSTEMS., .89 

Departmental Accounts; Raw Material Costs; 

Invisib^Le Waste; Productive Labor Costs; 

Overhead Costs; Typical Journal Entries; 

Accounting Books - Books Same as in Special 

Order Systems, Books Changed or Discarded; 

Chart. 

CHAPTER XIV - DISPUTED COST ELEMENTS 99 

Insurance, Rent, Taxes, Interest. 

-CHAPTER XV - ESTIMATING COST SYSTEMS - SIMPLE 

TYPE 105 

Basic Idea; Schedule of Estimated Costs; An- 
alysis of Inventory; Raw Material Costs; 
Productive Labor Costs; Overhead Costs; 
Goods in Process; Finished Goods; Correc- 
tion Adjustments; Typical Journal Entries; 
Accounting Books - Books Same as in Other 
Systems, Books Changed, Books Not Used; 
Chart. 

CHAPTER XVI - ESTIMATING COST SYSTEMS - COM- 
PLEX TYPE 117 

Departmentalization; Schedule of Estimated 
Costs; Analysis of Inventory; Raw Materi- 
al Costs; Productive Labor Costs; Overhea. 
Costs; Goods in Process; Finished Goods; 
Correction Adjustment; Typical Journal En- 
tries; Accounting Books; Chart. 



CHAPTER I. 

INTRODUCTION. 

Cost Ac counting 

Defined. Cost aooounting is that specialized 
application of the principles of accounting that 
results in the collection of "the data used to 
determine the cost o€ producing a unit of product 
in a faoto'ry. It is therefore evident that cost 
accounting is not a system per se to he set aside 
and distinguished as single- entiy and double- en- 
try bookkeeping are recognized as systems, but is 
rather the application of d cable -entiy principles 
;for the purpose of determining unit cost in rranu- 
faoturing . 

The fact that the main distinction between the 
accounting for trading and manufacturing concerns 
Is the difference in nature of the transactions 
recorded rather than a variance in the accounting 
principles involved is important, because it. ena- 
bles the cost accountant, who has become confused 
in the cost details, to recover his grasp on these 
details by resorting to the journalization of the 
transactions. 

Compared with Post-finding. V/hile sometimes 
used as synonymous with cost accounting, the term 
'^eost- finding" is frequently limited in meaning 
to the method used in determining in advance v/'hat 
the cost of an article should be under existing 
conditions. The exponents of the use of this lim- 
ited meaning of the teim "co st-finding" define 
cost accounting as the method of -deteimining casts 
while the article is being produced. From thi.-.^' 
point of view, cost-finding is prophecy,' cost ac- 
counting is contemporaneous history. 

Re la ti gn:- to G sne r al Ac c ou n i:i 'og . Cost accoatit- 
ing is a branch of general accounting, but it do st^s 
not include all of the subjects in the lattez*. The 
proprietorship accounting of partnerships, mergers 
and consolidations and the fiduciary accounting of 

1 



trustees, receiver^, and executors are outside 
tiie range of cost accounting. 

The fact that cost accounting must ascertain 
tl;e profit or loss on, the sale of indiYidual 
uiiits of goods sold, while general accounting 
is content to calculate the net results of all 
operations hy fiscal periods, forces tii e- former 
to classify its expenses luuch -more minutely than 
the latter, Gene3?al accounting charges the rent 
on the fa c to ry to man uf a c t uri ng expe n s e. an d the 
rent on the shipping warehouse to selling ex- 
pense, etc., v;hile cost accounting, thou^^ ac- 
cepting the ahove-mentioned classification of 
non-factory expenses, allocates the rent' to the 
various machines or operating departments. 

Valuation, reserves are much more importent in 
cost accounting than in general accounting. De- 
preciation is so important an expense that many 
factories use plant ledgers with a separate -ac- 
count for each fixed asset. In ttes^e subsidiary 
ledgers the periodic depreciation clarges and 
the hooic value of scrapped as'^ets are deducted 
f r om t h e c OB t of i n.s t al la. ti ons ' and r e p 1 a c e m en t s 
and the ledgers are therefore controlled by the 
excess of the plant accounts ;Over the reserves 
for d-epreciation. Repairs are so unimportant 
in mercantile concerns that s!eldom is any at- 
tempt made to distribute th em, uniformly over the 
periods. As repairs on machinery and plant con- 
stitute important and frequently very fluctua't- 
ing items of manufacturing overhead, many facto- 
■ries set up reserves for repairs. The undesira- 
b.ility, because of the resulting understating 
of future costs, of reducing the prices of the 
inventories of working assets whose markiet priori 
is less than the cost price has caused many fac- 
tories to use a reserve for inventory fluctua- 
tions. Of course, trading concerns should in- 
stall a reserve tor inventory iTIuctuations be- 
cause the loss due to a decline in prices is a 
financial rather than an operating expense, biit 
most mercantile firms ignore this point. 

The extended use of controlling accounts is- 



one of the marked differences between cost and 
general accounting. The large suras of money in- 
vested in factory inventories has necessitated 

-a system of internal check: on the vvorking assets. 
This internal check can be maintained by install-f 
ing g^eneral ledger account s , whl ch act as con^ 
trolling accounts for thjs subsidiaiy accounts 
for the various kinds of working assets. 

Relation to Factojry Management. As on© of 
the objects of cost accounting is to secure the 
data necessary to establish wise managerial pol- 
icies, cost accounting has a material effect on 
factory management. On the other hand factory 
management, through the ch^oice of wage systems - 
m^ethods of planning and raiting- orders, pur- 
chase and receiving systems, and plans of group- 
ing machinery, and through the standardization 
of product, greatly affects the technique of 
cost accounting. In fact, through the maze of 
complexities inserted into cost accounting tech- 
nique for m.anagerial purposes, the accounting 
principles involved are frequently obscured. 
Pot instance, it is somewhat difficult to real- 
ize that the raw material ledger card ^own in 
Chapter V, complicated as it is, is really noth- 
ing but a subsidi-ary ledger account, and, as 
such, can actually be maintained on an ordinaiy 
ledger account form. 

In this volume, the illustrative cost\ systems 
are chosen with an attanpt to minimize the com- 
plexities caused by factory management. -The var- 
ious fojms, therefore, illustrate 'the simple nor- 
mal forms from which those in actual, practice 
va ry . 

Kelation to Specialized Accounting. Cost sys- 
tems may be classified on three bases: (a) JCind 
of manufacturing process used, viz., synthetic 

"or analytic, (b) whether there are by-products 
or not, and (c) method of collecting cost data 
used, viz., special order, product (sometimes 
called process) and estimating ^'stems. This 
classification fa detailed discussion of each 
class will be given later) is important beca^ise 



the detailed study of an industiy exemplifying 
each Glass usually constitutes a part of the 
specialized aooo anting course. As the cost sys- 
tems used by specific industries are merely a- 
daptations of the fundariBntal systems used hy 
all, the industries of the same class, a thorough 
study of the cost accounting principles involved 
in the basic systems for each class of factories 
should precede the study of the acctjuntlng sys- 
tems of specific industries. 

Sometimes the study of specific cost systems 
43 -taken out of specialized accounting and in- 
serted into advanced cost accounting. This pro- 
cedure is satisfactory only if the cost account- 
ing principles involved in each class of cost 
systems have been previously studied. 

Relation to Constructive Accounting. The 
large number of variegated forms required in 
cost accounting makies the problem of outlining 
a cost system* for a factory an ideal method of 
developing the student's constructive ability in 
the accounting course in system building. As 
all cost forms are but channels through which ac- 
counting data are segregated into the factory ac- 
counts, a thorough course in "cost accounts Is a 
proper prerequi site to a course in system build- 
ing 

Relation to Business Statistics. The present- 
ation of cost data in the form of statistical ta- 
bles and graphic chaa^ts, v\^.lle outside the range 
of cost accounting, is of vital importance to the 
manager who relies upon cost figures in outlining 
his business policies. Business statistics, like 
factory management, and general, specialized, and 
constructive accounting, deals largely with the 
same business phenomena as does cost accoun-ting. 
Although all of these six subjects are closely 
related, the fact that general accounting devel- 
ops the science of accounts, while cost account- 
ing applies general accounting principles to the 
task of computing unit manufacturing costs; the 
facts that specialized accounting applies general 
and cost accounting principles to specific lines 

4 



of business, that constructive ace Q^^^^^j^^g clevel- 
ops ability in the art of building accounting 
^sterns for factories, that business statistics 
presents data on purchases, sales, P*^duction 
and costs in a usable form, and that factory 
management outlines t?ie principles of saocess- 
ful factory opeTation, show that each su bieot 
has its ov;n place in a business curriculum. 

Advantages and disadvantages. The advant _ 
ages of a cost system are that it (a) indicates 
the profitable and unprofitable lines of prod- 
uct, (b) renders possible the quotation of 
prices with a full knowledge of cost facts, (oj 
detects details of losses, (d) places a posi- 
tive checic on inventories, (e) discloses the 
relative efficiency of men and machines, ( f ) 
checlcs the cost estimates, (g) prevents unau- 
thorized increases in expense ani eliminates 
waste, (h) makes vital operating statistics 
available, (1) eTids in formulating and carry- 
ing out managerial policies, (3) makes possible 
the compilatj on of monthly financial statements, 
and (k) localizes responsibility. 

The, two disadv^qatages of a cost system, the 
opposition of managers, forfemen , an3 workers, 
ani the expense of installation and oiperation, 
are real, but can be met by making the system 
as simple as possible and then by using tact in 
its installation by. showing the operatives that 
the system will not work an injustice upon them 

Kinds of Costs 

The ordinary man ufac taring concern naturally 
divides Itself into thjree parts:- a fabricating 
section, an administrative section, and a sell- 
ing section. Each of these sections has its own 
charges to contribute to the final cost of the 
product placed in the hand>s af the purchaser. 
The fabricating section, however, has three 
kinds of clarges quite di-fferent in natiire, naine- 
ly, material, direct labor, sand orerhead^ Upon 
the addition of each of these various classes of 



9:xp9n»9S to the value cloax^ed against the prod- 
uot, a new kind of cost Is secnired, as ^own in. 
the following ohart: 



Material 



Direct 
Labor 



Factory 
Overhead 



Selling 
Expens e 



General 
Expense 



..Prjine Cost.. . 

Factory Cost.. 

Selling Cost 

- . - .Total Cost. 



Within the- fahri eating section there may he 
still another Kind of cost, for, when the pro- 
duction costs are collected hy departments, the 
suTTimati on of the materj. al, direct lahor, and 
overhead charges v/ithin a factory department 
constitutes a departmental cost,. 

Non-Cost Boolcs 

Vouchers Payable Begister. The vouchers pay- 
able register is frequetitly used, as it distrib- 
utes the expenditures as well as a purclmse 
journal and at the same time eliminates the pur- 
chases or ace aunts payable ledger, "When an ob- 
ligation is incurred, a voucher jaelcet is pre- 
pared, showing date, number, vendor,, distribu- 
tion, total smount , aad signature of authorizing 
official. The voucher i:s then entered in the ' 
vouchers payable register, and placed numerical- 
ly in the unpaid file, together with substantiat- 
ing data such as copies of invoic-e-S, payrolls, 
etc. After payment, the voucher is placed in 
the paid vouchsrs file, either nuneri cally 'or by 
name of vendor. The check nuiaber and date of 
payment are recorded in the vouchers payable reg- 
ister, so the open items represent the outstand- 
ing vouchers payable at any time. 

The simple example of a vouchers payaDle reg- 
ister shown on page 7, gives the entries for 
purchases of materials, supplies, and tools, for" 
payrolls, and for fire insurance premiums. 

Gash Book. The vouchers substantiating cash 



"VOUCHERS PAY 


DATE 


VO. 


lIAilE AND DESCRIPTION 


TEEAIS 


CHEDITS 




VOUCHEES 
PAYABLE 


MATE- 
HIALS 


PROD. 
LABOR 


MF5. 
EXPENSE 


May 1 
8 


89 

90 
91 


"3" Conipany 
Payroll 
"W" Conpany 


2^2- 10 

■ net 
net 


sol. 000 

59,200 
2,0CC 





*55.'666 


%h>\hm 



A 3 L E REGISTER 




DEB-ITS 


DATE 
PAID 


CHEGJ! 


SSI-lKOB ADM. 


PA CI CRY 


.TOOLS 


SUNDRY ] 


n-MS 


AC J GUN T3 . 


I , j;' . 


AMOUNT 


|500| fVDO 


^1,000 


5500 


Insurance 


■io 


$2!666 


May 8 
5 


87 
86 



J? E c E I :p 



May 1 
2 



SXPLANATIOIT 



Thomas Walton 
Notes Receivable 
Interest Earned 



ACCOUNTS 

ffiCSIVABIE 

CR. 



$20,000 



SALES 
DISCOUNT 

PR. 



$400 



CASH 



$i9;6o(f 

•3,000 
200 





CASE D 


I S B U R S E M E N T 


s 


DATE 


EXPLANATION 


70.^ 
NQ,- 


CHECi: 

\-o. 


VOUGSSBS 
PAtABLE 


purchase; 

DISCOLTfT 


cask 

OP T . , , 


^ay 1 
6 


Payroll 
"S" Company 


90 
89 


8q 
8? 


$'39-200 

5i,aoo 


lil.oio 


%m . 200 
50,470 



receipts, such as cashier* s duplicate receipts, 

letters of transmittal, and "bank deposit slips, 
are too infoTmal and irregular to be recorded 
in the cash receipts book. The form given on 
page 7 is fairly typical of a simple cash re- 
ceipts, bo olc recording the collection of a cus- 
tomer's account and of en interest-bearing. note. 

Under a voucher system, the casfih disburse- 
ments are substantiated by foimal documents, 
the voucher jackets and checks. tlB numbers of 
Which are recorded in the cash disbur-sements 
book. The form given on page 7 is fairly typi- 
cal of a simple cash disbursements book record* 
ing two payments, one involving purchase dis- 
counts and one not. 

Sales Book. The sales are substantiated by 
formal vouchers, the shipping reports, which 
are numbered consecutively and recorded in the' 
sales book. The sales book illustrated in Chap 
ter II. is. applicable to a non-cost system, if 
the money column headed "Cost Price" together 
with the resulting postings is eliminated . 

General Journal. The general journal of a 
factory operating without a cost system fre- 
quently is the same as the general journal of a 
mercantile firm, both as to form (usually the 
ordinary journal ruling) and es to the method of 
substantiating the entries either by formal 
journal vouchers, in which case no explanation 
other than numbering the entiy and its voucher 
need be made in the general journal, ard by 
fully explaining the entries initialed by the 
responsible officials . 

General Ledger. The general ledger requj red 
for non-cost accounting systems for factories is 
the same as that used by mercanti le firms, both 
using ordinary "T" accounts, and both listing 
the real and nominal accounts in approximately 
the same order. 

Sales Ledger.. The sales ledger in a non-cost 
system for a factory can contain accounts in 
either the ordinaiy "T" form or in any of the 
other fonns commonly used by mercantile firms. 
The sales ledger is controlled by the "accounts 
receivable" account/ in the general ledger. 

8 



CHAPTER II. 
COST AND NON-COST SYSTMS COMPARED 
Cost Books 

Books Same as Non-oogt 3oo]^3. As tlce ohang- 
ing from a non-cost to a go st system of account- 
ing does not affect the firm's transactions with 
outside concerns, the same forms of the follow- 
ing books are applicable t a both sys'tems of ac- 
■oounts: (1) vouchers payable; regi ster, (2) cash 
receipts book, (3) cash disbursements book, {4) 
general journal, (5) general ledger, and (6) 
sales ledger. 

Bo.oks Slightly Changed.^ The sales book in a 
cost system is different from the form used in 
a non-cost system in that it is necessary to re~' 
cord the cost price as well as the sales price 
of the goods sold. At the time of periodic 
posting to the controlling accounts, the total 
of the cost price of the goods sold is debited 
to the "cost of sales" account and credited to 
the "finished goods" account, and the total of 
the sales price of the goods sold is debited to 
the '^accounts receivable" account and credited 
to the "sales" account. A simple form of sales 
book, ^ich is fairly typical of those used in 
factory cost systems, is given on page 10\ 

Books Nat Used in Non-cost Systems. The 
books peculiar to cost systems are the (^j retiui- 
sition journal, (2) retarned materials journal, 
(3) finished goods journal, (4) raw materials 
ledger, (5) goods in j^mcess ledger, and (6) fin- 
ished goods ledger. 

1. The transfer of raw materials out of the 
stbreroom and into the faotoVy is recorded in a 
requisition journal, a simple form of v4ilch is 
shown on page 10. The total of the cost value 
of the raw materials is sued is debited to the 
"goods in process" account (the prime cost sec- 






R E Q I 


r 1,3 I T 


[ON JOURNAL 




Wr 

2. 


HER. 
NO. 


J 03 






EXPLANATION 


AMOim 


84 


61 








-|56# 



RETURNED MATER. lALS JOURNAL 



)ATE 



EXPLANATION 



Mou^ 



lay 3 

4 



25 





F I 


NISHED GOODS 


JOURNAL 




DATE 


PR05. 

REPT. 

NO. 


JOB 


EXPLANATION 


GOODS 
DR. 


aooDS m 

PROCESS 


EXPENSE 


iay 6 
9 


50 
51 


^ 




$1,200 

, 1.000 


$1,050 
900 


|l50 
100 



tiOB. would be debited If the acoount is -«uVdA,vid- 
ed) and credited to the "ravv materiiallS'' aceoi^Ht^ . 
•Ihe 'entries to the subsidiary account-s are, -rfla-de 
directly from copies of 1ii^ requisitions 

8, The return of excess raw matetiais from 
the f ac t or y to th e storeroom is re cd r d e d iga ;a 
returned materials journal, a simple form" of 
which is shown on rage 10. The total of the 
cost value of the raw materials returned is deb- 
ited to- the "raw materials" account and credited, 
to the "goods in process" account. The entri-es 
to the subsidiai^' accounts are made directly frou 
copies of the returned materials memos. 

3. The transfer of completed manufactured 
goods from the facto ly to the stock:room is record- 
ed in the finished goods journal, a simple form 

of which is given on page 10. The tot^> factory 
■etsst of the finished goods transferred is debited 
to the "finished goods" account and credited to , 
the "goods 'in process" account. If the "goods in - 
process" account is subdivided the credit would 
be prorated properly between the various sections 
of the, account, viz., if the overhead applicable 
to.goo'ds.in process is retained in the "manufact- 
uring expense" account until the goods are com- 
pleted, both 'the "goods in process" and "manufac- 
turing expense" accounts would be credited « The 
entries to the subsidiary accounts are made di- 
rectly from copies of the production reports. 

4. The raw material ledger, commonly called 
stores cards, is merely a book: of subsidiary 
ledger acco.-unts controlled by the "raw materiaels" 
acGoant in the general ledger. These su:bE^i diary 
accounts can be maintained on "T" ledger a-GCQurii 
forms, T3U-t, as it is necessary to collect d^ta 
other than m^jre debits and credits for m§nag6r-la.i 
use, information as to future supply, and the re- , 
ceipt and iSvSue of liie materials is correlated by 
recording the numbers of the purchase orders .ma- 
terial received reports, an^ requi si ti ons on the' 
ledger forms. In ProbleBia 5-^- and 6-A the sub- 

•Si diary raw ina'teri als accounts are jnaintai ned on 
"T" ledger forms- In ot^j&t to emphasize the con^ 

11 



trol feature, bat thereafter a form topical of 
those found in actual use in faotoried (see 
Chapter V for illustrative form) is used. 

5. .The goods in process ledger, commonly 
called cost sheets, is a book merely of subsid- 
iary ledger accounts controlled by the "goods 
in process" account, or subdivision thereof, in 
the general ledger. These sub^idiaiy ledger ac- 
counts can be maintained on "T" ledger account 
forms ('"T" forms are used in Problems 5- A, 6-A, 
and 7-A in order to emphasize the control feat- 
ure), but usually the "T" account forms are in- 
adeciuate as a reeord of labor hours (see Problem 
&'-A) , or total machine hours (see Problem 9-A) , 
or specific machine hours (see Problem 10-A, 
11-A, and 12-A) must be maintained, A simple 
^orm of cost sheet typical of those actually 
used in factories is given in Chapter XI. 

5. The finished goods ledger, commonly 
called stock cards, is merely a group of subsid- 
iary ledger ace cants controlled by the "finished 
goods" account in the general ledger. Like the 
subsidiary accounts for raw materials and goods 
In process, the finished goods subsidiary ac- 
counts can be maintained on '*T" ledger account 
forms ( "T" forms are used in Problems 5-A ariQl 
6-A in order to emphasize the control feature), 
but usually the "T" ledger account forms are in- 
adequate as the. numbers of the production orders, 
production reports, and shipping reports must be 
recorded on the ledger forms for managerial pur- 
poses. A simple form of stock card typical of 
those actually used in factories (maintained in 
cost problems following Problem 6-A") is given in 
Chapter XII. 

Chart 

The chart shown on page 13 presents in, diagram- 
matic form the accounting books and records used 
in a factory operating on a special order cost 
system. The books and records are arranged and 
connected so as to show the functi ons of each . 

12 





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the course of entries from one to another, and 
the general relations each "bears to the others 
and to tlie & stem as a whole. 

Accounts ii _ Cost and Non-cost Systems Compared 

In order to illustrate the difference in the 
operation oi' the accounts under cost and non- 
cost systems, journal entries recording the var- 
ious classes of transactions under the two sys- 
tems are tabulated and posted to lii e accounts 
given in a starting balance sheet, v/hich is the 
same in both systems, and then trial balances 
•and financial statements are drawn up for the 
accounts under each system. 



"A" MANUFACTURING CaviPAlO' 
BALAIfCE SHEET 
January 1. 1921. 

Assets 

Cash |1,000 

Accounts Receivable 

Reserve for Bad Debts 
Raw Materials. 
Goods in Process 
Finished Goods 

Plant 

Be-serve for Depreciation 



Liabilities and Capital 

Vouchers Payable 
Capital Stoclj: 
Sturplus 



|5,000 
500 


2.500 
2.000 
1.000 
5.000 


150.000 
10,000 


40.000 
149^500 




$1,500 
45,000 

5.000 
$49^o00 



14 



JOURHAX 3NTEIES 



Vni.»T Von^coat System 

For Parohaae of 



Under Cost System 



Baw llaterials 

Vouchers Payable 



^35.000 



law Materials 
Raw Materials 

Voushsrs Payable 



#35.000 



Productivf Labor 
Manufaoturi r.g Expense 
Offio* ^s-larles 
Sala«»ren'3 Salari 98 
Vo'ajhars Payalil© 



Msnufacturing Expense 
Bad Debts 

Beserre for Dajyeoia- 
tion 

Reserve foi Bad Debts 



l5o.ornr" 

■5,000 I 

8 .000 j 

12,000 I 

#•'5,000 I 

For Additions. jti 
♦5.(»0 " #1 

1^000 L. 

l'«00 I 



anae 

Office Salsria8=T" 

Salesmen's Salaries 

Payable 



Reserves 
■anufacturing Expense ^ 
:pad Debts ". 

"^-»- Re.aerve for Depraala- 
tlon 
Reserve for Bad fiabts 



#60,000 
5,000 
8,000 
12,000 



#75,000 



?»r Issue o f Material 

Iboods in Process 
Haw Materials 

•For'-?TC»atfoa of. Prottac-tlve. labor arid Kanufscturlrig Sxpc 



■ #32 ,000 



(SoVDOTaw^" 



il^&l^pj 



#5U.0> 



J Goqfds in Proci 

I Productive Labi 

I Manufacturing Expense 

Completion of Finished Goodg 

Finished Goods #90,000 

Goods in Process j 



Aoewant's f^eceivebla #125,000 


r Accounts Receivable 


$125,000 


Saa»3 ^ 


#125,000 1 
For Cost of 


Sales 
Sales, 




^ 


<»o Entry) 


1 C 


ost of Sales 

Finished Goods 


#88,000 


For Collec 


tion of AOco 


unta Rece 


ivable 




Caab #ll6.00(i 


1 ^ 


ash 




#116,000 


Sales 3Jla<j«unt 4,000 


1 Sales Discount 


4,oao 


AC30unta Eecel-rable 


#120,000 1 


Accounts Reoeivabl 


i 


For 


Payment of 


Creditors 






V^uchera Payable ^111 .000 


V 


ouohers Payable 


$111,000 


Pnrctaa* Discount 


#6,000 


Purchase Discount 




£a3h 


105,000 


Casii 






"A- 


KANUFACTURIKG COMPANY 
TRIAL BALAKCES 








December 31. 


1921 








Non-cost 


System 


Cost Sy 


stem 


Casfc 


#12,000 




#1S,000 




Accounts Receivable 


6,000 




8,000 




Reserve for Bad Debt 


3 


#1.500 




$L,506 


Raw iJateriala 


37,000 




5,000 




Goods in Prooeaa 


1.000 




3.000 




Finished Goods 


3,000 




5,000 




Plant 


50.000 




50,000 




Reserve for Depreciation. 


15.000 




15 ,-000 


Touchers Payable 




500 




500 


Capital Stock, 




45,000 




45,000 


Surplus 




3.000 




3,000 


Productive labor 


50,ooa 




nil 




lleiiizf eoturi ng Expenae 10 , 000 




nil 




Cost of Sales 


nil 




88,000 




Office Salariae 


6,000 




8-. 000 




Salesmen's Salaries 


12,000 




12.000 




B^d Debts 


1,000 




1,000 




Sales Discount 


4,000 




4.090 




PurcdiBsa Discount 




6,000 




6,000 


Salaa 


125,000 
#195.000 ilaSlOoO 


125.000 

#196.000 fifi.m 



#88. 000- 



#6,000 

ioe,o«) 



From the above it can "be seen that the non- 
cost trial "balance can he turned. Into the cost 
system trial balance by the following journal 
entry: 

Goods in Process $2,000 

"finished Goods 2,000 

Cost of Sales 88.000 

Raw Materials |32,000 

Productive Labor 50,000 

Manufacturing Expense 10,000 

The above credit items, totaling $92,000, 
represent the total manufacturing cost charged 
to goods in process. Of this, $90,000 repre- 
sents the production cost of goods in process 
completed during the period and transferred to 
the finished goods account, and the remaining 
$2,000 represents the amount added to the inven- 
tory of the goods in process. Of the $90,000 
charged to the finished goods account, $88,000 
represents the production cost of the goods sold 
that was transferred from the finished goods ac- 
count to the cost of sales account, and the re- 
mainder represents the amount added to the fin- 
ished goods inventory. 

Before a financial statement can be made from 
the non-cost trial balance, the inventories must 
be ascertained. The inventories are: Rav/ mater* 
ials $5,000, goods in process $3,000, and fin- 
ished goods $5,000» It will be noted that these 
inventories are the balances of the respective 
accounts in the cost system trial balance. 

The balanc-e sheet is the same for both sys- 
tems of accounting, so the statement on page 17 
will be the balance sheet that would be obtained 
from both trial balances. 

As cost accounting is merely an addition to 
financial accounting, which by internal adjust- 
ments shows the cost of goods manufactured, the 
illustration on page 17 shows that the profit and 
loss statem^ents obtained from the cost and non- 
cost trial balances are identical, af*ter the grosd 
-orofit on sales has been obtained. 

16 



"A" UAHUPACTUHIHG COMPANY 

BALANCE aiEET 

Deoember 31, 1921 



Assets 






Cash 




$12,000 


Accounts Receivable 


08 ,000 




Reserve for Bad Debts 


1.500 


6,500 


Kaw Materials 




5,000 


Goods in Prooea« 




3,000 


Finished Goods 




6.000 


Plant 


i'SOfOOO 




Reserve for JJeprecia- 






tlon 


15.000 


35 .000 






166.500 



liabilities and Capital 
Voucfcet's Payable 
Capital Stock: 
Surplus 



|500 
45,000 
21 .000 



t66.500 



•A* manupactuhihg CCUPADY 

PROFIT AXL LOSS STATaEHT 
For Year Ended Deaeciber 31, 1921 



Sales 

Cost of Sales: 
Materials 

Toventory-Pina] 
Productive Labor 
BanufacturlnF Expense 

Goods In Process : 
Deoember 31, 1921 
January 1, 1921 

71nlabed Goo'ds: 
December 31, 1921 
January 1, 1921 
Gross Profit on Sales 
Operating Expenses: 
Salefrcsn' 8 SalarJ «8- 
Office Salaries 
Net Profit' on Salea 
Hon- operating Items 
Income : 

Purohasd 'P^^covmt 
Expense ; 
Bad Debts 
Sales Discount 
Net Profit for Period 



Hon 


-303t System 

§125,000 






Cost System 

1125,000 


♦37,000 
5.000 


i^32,000 
50,000 

ig.oog 

592^000 










J3,000 
1.000 


$3o;ooo 










§5,000 

3.0C0 


2.000 


88.00C 
■$37,00C 






88.000 
IMiOOO 




^12 ,000 
8 000 


fl^lOOO 






J12.000 

8.000 20.000 
f 1^000 




*6.00O 








$6,000 


ii.ooo 

4,000 


5.000 


i.OOO 

jislooo 


4 


000 
000 


5.000 1.000 

■ ' §ie;ooo 









CHAFTER III 

GENERAL AND FACTORY BOOKS 

General Offi oe Book^ 

Boolcs Outlined in Chapters I. and II Not Used. 
The home office of a man ufao taring ooncem that 
maintains separate faotoiy Ix) oks usually will 
not use a vouchers payable register, as there 
is no need to classify the factory expenditures 
on the general office boolcs. 

Books Not Outlined in Chapters I and II Used. 
The practice of recording the creation of vouch- 
ers payable in "the general journal Instead of in 
a vouc?iers payable register, causes the general 
offices of factoiy concerns to maintain purchase 
ledgers, the rulings of v/hich.are similar to 
those of the sales ledgers. Large concerns use 
a purchase jou'rnal in conjunction with the gen- 
eral journal, although this is not necessary. 

Books Same as Outlined in Chapters I and II. 
The cash receipts book, cash dl sbur semaits book, 
general ledger, and sales ledger are tiie same in 
form and use when separate :Qactory books are 
maintained- as they are when only one set of books 
is kept. 

Books Changed Sllpjatly. As the "finished 
goods" account is a factoiy ledger account , the 
amount of the total cost of goods sold should be 
credited in the general office books to the "fac- 
tory ledger" account Instead of to the "finished 
goods" account, if a separate factory ledger is 
maintained. The form of the sales book would, 
however, be the Same under both systems. 

Books Greatly Changed, As the home offi ae 
general journal, \^ en separate factory books are 
maintained, combines some of the fufictions of the 
vo.uchers payable register and of the general jour- 
nal vhen only one set of books is maintained, it 
usually has special money columns. The form giv* 

18 



en on page 20, \Aaiich records the same transac- 
tions as the vouchers payable register form giv- 
en in Chapter I, is fairly typical... 

Factory Office Books 

Books Same as Outlined in Chapter II, A set 
of factory office "books, v\h en kept separate from^ 
the general office r-ecords, includes the follow-' 
ing books* in practically the same form as they 
are used when only one set of books is kept: (a) 
requisition journal, (b) returned materials 
journal, (c) finished goods Journal, (d) raw ma- 
terials ledger (stores cards), (e) goods in proc 
ess ledger (cost sheets), and (f) fini^ed goods 
ledger (stock cards). 

Books Changed Greatly. The same 'reasons that 
oauae the columnarizati on of the home office gen- 
eral journal cause the use of special mOney col- 
umns in the flactory office general journal. The 
form given on page 20, which records the effect 
on the factory books of the transactions entered 
on the vouchers payable register form given In 
Chapter I, is fairly typical. 

Chart 

The chart shown on page 21 presents in dia- 
grammatic form the accounting books and records, 
used in a factory operating on a special order 
cost system, vAien separate books are maintained 
at the general office and at the factory office. 
The books and records are arranged and connect- 
ed so as to show the functions of each, the 
course of entries from one to another, and the 
general relation each bears to the others and to 
the system as a whole. 

General and Factory Ledger Accounts Compared 

In order to illustrate the difference in the 
operation of the general and facto ly ledger ac- 
counts, journal entries recording the effect of 

19 





HOME OF?IC 


E GENERAL 


J U R N A L 




DEBITS 


EXPLANATION 


OREL ITS 1 


FACTORY 


IIOTES 

RECEIVABLE 




L.?. 


L.F. 


SUNDRIES 


VOUCEEES 


FACTORY 
LED CER 


$51,030 




$606 


18 


May 1, iyii2 
Pdotory Ledger 
Tools 

"S" Company 


93 




$51 i 600 




38,000 


::;: 


606 

700 


V' 

E2 
23 


5>ctory Ledger 
Selling Expe;i3< 
Adnin. Expense 

Payroll Fay- 
able 


27 


|39,200- 


:::::: 


:::; 




.... 


2,000 


19 


May 8, 1922 
Insurance 
"X" Company 


94 




'2 [666 


:::: 



FACTORY OFFICE GENERAL JOURNAL 



GENERAL 
LEDGER 



RAW 

!<IATSRIALS 



DEBIT! 



$50,000 



11,000 



35.000 
3.000 



EXPLANATION 



May i, iyj:!g 
Raw Materials 
Factory Sup- 
plies 
General Led- 
ger 

Productive La- 
bor 

Manufacturing 
Expense 
General Led- 
ger 



L.F. SUNDRIES 



CREDITS 



FINISHED GENERAL 
GOODS || LEDGER 



|61,000 

































r 














1 










1 1 




CO 














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the various classes of transactions on "both 
ledgers are talDulated and posted to the ac- 
counts given in starting trial balances, and 
then the trial balances of "both ledgers are 
drawn up. All the figures used agree w: th 
those used in the comparison of the entries 
in cost and non-cost systems in Chapter II. 
(See page 15.) 

The balance sheet and profit and loss 
statement from the trial balances below are 
the same as the final cost statements shown 
in Chapter II, as. the "general Ledger" and 
"factory Ledger" accounts are eliminated 
against each other in consolidating the trial. 
balances . 

"A" MANUFACTURING COMPANY 
TRIAL BALANCES 
January 1, 19'21. 



Gash 

Accounts Receivable 

Reserve for Bad Dbts 

Raw Materials 

Goods in Process 

Finished Goods 

Plant 

Reserve for Lepreci 

ation 
Vouchers Payable 
Capital Stock 
Surplus 

factory Ledger Acct 
General Ledger Acct 



General 


Ledsei' 


Factory Lede;er 


|1,000 






3,000 


|500: 


#2,000 
1,000 
3,000 


50,000 


10,000 
1,500 

45,000 
3,000' 




6,000 




16.000 


$60,000 


160,000 


16^000 16., 000 









22 



JOURNAL SNTRI'Ei 



' fiej;rdlrig Fayr 'll 



factory; Ledjsgr 



Factory Ladgar 
Office Salaries 
Salesmen's Salaries 
Truchera Payable 



165.030 
3.000 
12.000 



Factory Ledger 
Bad D*bta 

Peaerve tot Deprecia- 
tion 

Raeerve .for Bad De^ts 



?or Additio 

»57JTO 

1.000 



IPridvistJve Lsbbif 
i^anufac taring Expense 
General Ledger 



to Reserves 

IJManufac taring Expense 

V. General Ledger 



^5.000 



^5. ceo 



of Uateri al 

i Good 3 in Frace. 
Kaw Materia 



ve lator and Manufacturing Expense 

Ocods in Process 460,000 

Prodaoti ve Later \ 

McTiUfaoturi ng Expense 



(No Entry) 




n Finished Goods 

H Goods in Process 


accounts Receivable 
Sales 


#125 


For Sales 

,000 I" (No Entry) 
$125. COO 11 


Cost of Sales 

Factory Ledger 


|38 


For Cost of Sales 
.000 B^Generel Ledger 

$88,000 1 Finished Goods 




For C 


Dlleoticn of. Accounts Eeceivable 


Cash tiie 

Sales Discount. 4 

Accounts Receivable 


000 (No Entry] 
COO 

4120.000 


Youehera Payable 
Parchase Discount 
Cash 


im 


^n>r Pa.y.ent of ^redi^tors^^ 

^o.OOOl 
105 .000 1 



Cash 

Acco-onts Receiva-ble 
Reserve- for 3ed Oebts 
Paw Materi als 
Soods in Process 
Finished Goods 
Plant 

Reserve for Eepreeiatioi 
Touchers Payable 
Capital Stoat- 
Surplus 

Productive Labor 
Manufacturing Expenae 
Cost of Sales 
Office Salaries 
Saaesxen' 3 Salaries 
3ad -Debts 
Sales Discount 
Purofcase Iii3 20'ant 
Sales 

Factory Ledger Account 
General -Ledger Account 



," yAlTOFACTURING COKPAUY 
TBIAL 3ALAKCSS 
:Dececiber 31, 1921. 

General Ledgea 
#15 ,0(50 





15,000 




500 




45 ,000 




3,000 


88,000 




8,000 




12,0Q0 




1,000 




4,000 






6,000 




125.000 


13,000 




$194,000 


fl96.000 



^88.000 



CHAPTER IV. 
FACTORY PROIUCTION ORDERS. 
Kinds of Orders 

Factory Produotion orders may be classified 
according to IJie objects prodaoed, viz., fin- 
ished goods or component parts Ihereof, fixed 
assets, betterments, and repairs. Of course, 
the usual order authorizes the manufacture of 
finished goods. The other kinds of orders are 
usually differentiated from orders for product 
by either being written on differoit colored 
paper or by having a letter placed after the 
order number. 

Orders for Product. There are two main types 
of factory orders for product ^ viz., manufact- 
uring orders and assembling orders. The former 
authorize the nmnufacture either of completed 
products or component parts, viiile the latter 
authorize the assembling- and further processing 
of component parts into completed products. The 
journal aatry for the completion of factory or- 
ders for product is: 

Finished Goods | 

Goods in Process-Prime Cost |....> 

Manufacturing Expense ^ . . . . -. 

Orders for Construction. Construction orders 
raise the question of valuing the fixed as-set 
produced. If "Qie market price of the fixed as- 
set Gonstructeti is less than the cost, the asset 
should be booked at market and the excess of 
cost over market price written off to profit and 
loss. If the market price of the fixed asset 
constructed exceeds the cost, the asset should 
be capitalized at the cost price, as the excess 
of the market price over the cost price is a sav- 
ing rather than a profit. The journal entry for 
the completion of a factory order for construc- 
tion is : 

^4 



Plant and Equipmait 
'Goods in ProGess-Prime Cost 
Man ufao taring Expense 



Orders for Betterments. When the woxfe ex- 
pended on a fixed asset renders that asset more 
valuable "than its original cost value less ac- 
arued depreciation, the excess of th e final val- 
u^ over the book value of the asset is a better- 
ment, and the remainder of 13ne cost .of the work 
expended on' th e fixed asset is "the cost of the 
repairs. If the betterments are permanent, 
their cost is chargeable to the proper fixed as- 
set account, but, if the betterments are not per- 
manent, their cost is chargeable to a deferred 
charge to income account. The journal entry for 
liie completion of factory orders fo"r betterments 
is: 

Plant and Squipmaat (for permanent 

items) ^. . . . 

Non-permanent Bettermants (for 

non-permanent itons) $.... 

(Joods in Process-Prime Cost !•••• 

Manufacturing Expense f.... 

Orde-rs for Repairs. Worlj: expended on a fixed 
a.s3et to restore the asset to its original "mlue 
less accrued depreciation is chargeable to re- 
pairs. It -is : Important to di fferenti ate repairs 
or the replai^c^jsej^t. of parts of units of fixed as- 
sets, from renewais, or the replacement of entire 
units of fixed assets. The journal entries for a 
renewal are : 

For scrapped asset . 
Reserve for Depreciation ( ac- 

crued d,eprec2a ti on) 
surplus (loss) 

Plant and Equipment (ori^glnal 

cost pri-ce) $*.. . 



25 



For new assets. 

Plant and Equipment (purchase 

price) I 

Vouch? rs. Payable f . . , . 

The journal entiy for the completion of a fac 
tory order for repairs is: 

If reserve for repairs ig maintained, 

Res-^TVe for Repairs $.... 

Goods in Process-Prime Cost 
Manufacturing Expense 

If reserve is not maintained. 

Repairs (later closed into Manu- 
facturing Expense) $. . . . .. 

Goods in Process-Prime Cost f**** 

Manufacturing Expense $..... 

Forms of Production Orders 

The fact, that qu.ite a large number of people 
need to knoV; about factory orders, makes the use 
of formal production orders necessary. The. sim- 
ple foim on page 27 is typical of the normal form 
from which the forms used in fac tori es vary. 

Variations in the form of production orders, 
or carbons thereof, sometimes provide space to 
(a) record the progress of tne job, (b) accumu- 
late cost data as the job goes through the dif- 
ferent manufacturing processes, (c) record the 
elapsed time put in on the job,, and (d) itaoaize 
the material that should be requisitioned for 
the job. 

Authorization of Orders 

The source of authority for the various kinds 
of factory production orders varies somewhat. 
Orders for product are authorized by (a) the 
sales department to fill custo-mers' orders, (b) 

26 



PRODQCTIOU ORDER 

No . 6Q- .. 
To Department #1 Date May 1. 19 2^ 

When wanted May 8 , 1922 



Desorlption of Artlc3les Wanted 



2,000 units Finished Goods #1 



Approved X* Y. Signed A. B> 



tiie stockslceeper to replenish stocks of standard 
products, or componoflt parts, v;hich have been de- 
pleted below the specified minimum, and (c) the 
factory manag-ement to manufacture new or special 
styles of products. Orders for construction are 
authorized by the general manager after the pro- 
ject has been favorably acted upon by the board 
of directors. Orders for betterments are author- 
ized by the factory manager. Orders for repairs 
are authorized either by the head of the repair 
department or by the factory manager. 

Sche.dulin^ of Orders 

Production orders are used by factory managers 
as a means of prorating the work over the factory. 
The scheduling of factory orders is done (a) to 
keep the various men and machines uniformly busy, 
and (b) to keep the supply of standard parts, ac- 
cessories, etc^ , above an established minimum. 



£7 



Copleg of Orders 

Copies of production orders, which may or rnay 
not "be exactly similar in form to the original, 
are usually sent to (a) 1iie permanent fi la of 
the issuing office, (h) tlie accounting office 
for cost purposes, (c) the factory manager ( each- 
department manager if the factory is department- 
alized) to serve as authority and also for use 
in planning and scheduling, Id) storeskeeper, to 
apprise him in advance o.f mateilal requiremeaats,. 
and (e) stockskeeper, to advise him of forthcom- 
ing stocks. 

Accounting Use of Orders 

Under all systems of cost accounting, produc- 
tion orders constitute the authority to manufac- 
ture and a means of differentiating between 
kinds of production. The acoounting use of fac- 
tory orders varies greatly, however-, in the var- 
ious accounting systems. 

Under Product Systems. Production orders in 
continuous product industries, like flour and 
textile mills, are of little direct accounting 
use in that they are not used as the bases upon 
which costs are calculated-. A facto ly order un- 
der a product cost ^- stem frequently authorizes 
a whole season's r;m of a certain prodact. as 
there is little use to differentiate between the 
costs of exactly similar products like- barrels 
of flour. The periodic unit costs are therefore 
computed by subtracting the final inventory of 
goods in process from the total manufacturing 
outlays including the initial inventory of goods 
in process, and then dividing this difference by 
the number of units produced. 

Under Special Order Systems. Wlien dissimilar 
products are manufactured, the cost of the raw 
material and productive labor applicable to each 
job is computed, the journal entry being: 

28 



Goods in Prooess-Prime Cost 
Haw Materj als 
Prodaotive Labor 



$ • • • • 
f • • • • 



When tJ-.s production order is completed, the 
j urna 1 en t r y is: 

Finished Goods $•... 

Goods in Pro cess- Prime Cost $.... 

Manufacturing Exp aase (for 

amount a ppiicahle to job) $..•.. 

The "goods in process-pri m.e cost'* account in 
the above jt)urnal entries is a controlling ac- 
count, the balance of vhich equals the total of 
the rav/ material and productive labor charges 
on the cost sheets of the uncompleted production 
orders • 

The chart on page 30 ^ which j^ ows tke inter- 
relation of the detailed records of a factory 
operating under a special order cost, system, 
demonstrates the pivotal position of the produc- 
tion orders through their cost sheets. J\^ormal 
forms of 1h e detailed records are given later. 



Sub-production Orders 

When different integral parts of the products 
covered by factory producti on orders- are made in 
different departments and are ihen assembled, 
separate sub-producti on orde'rs, numbered to agree 
with the main orders except for the letters or 
symbols designating the departments, may be is- 
sued to each department. The costs on the sub- 
productj on orders are combined with the assanbl- 
irig costs to ascertain the cost of the whole or- 
der. 



29 









De- 




mTERIAL 
RECEr/ED REPORT 


H- 


' PURCHASE 
ORDER 


PUl^OHASi: 

REQUISITION 


w 








MATERIAL 

LEDGER 


1— 


MATERIAL 
CREDIT MEMO 


TIME 
TICXET 


1 




T 




MATERIAL 
REQUISITION 


•H 


PROD. ORDER 
_COST SHEET _ 


PAYROLL 


, 




PRODUCTION 

REPORT 


-^ 


PIITISHED 
GOODS LEDGER 


OTERHEAD 
(NO MEMO) 






1 




SALES 
ORDER 


— ^ 


SHIPPMG 
EEPOR'T 


SALES 
lEFYOICE 


Chart Showing I 


nt 


arrelation of 


bailed Records 



30 



CHAPTER V 

PUHCHASING AND RECEIVING MATERIAL 

Purchase Requisitions 

V/henever a demand aii ses for raw materials 
riot earri ed in the storeroom, or the stock of a 
standard kind of raw. material falls he low the 
specified minimum, the storeroom manager fills 
out, except the "date ordered" and the "purchase 
order numher" columns, a purchase requisition, 
somewiiat similar to the form given on page 32, 
v/hich he sends to the purchasing agent. A car- 
bon copy is then placed in the storeroom files. 
Purchase requisitions may vaiy considerably from 
the siiTiple form mentioned above. In order to 
save time in the purchasing department the num- 
ber of the last purchase order, name of vendor, 
and price are sometimes given. 

Purchasing: Department 

The duties of the purchasing agent consist in 
securing (a) the lowest prices possible, (b) 
prompt deliveries, and (c) favorable cash and 
trade discounts. Detailed records of prices, 
freight rates, and names of vendors are there- 
fore carefully compiled in the purchasing depart- 
ment . 

On the receipt of a purchase requisition, the 
purchase department issues a purchase order some- 
what similar to the foim given on page 32, sends 
the original to the vendor, places a carbon copy 
'\:Ogether with the origj.nal purchase requisition 
(properly completed) in its own files, and for- 
Y/ards copies to the (a) accounting department, 
Cb) receiving department, and (.c) stores depart- 
ment. 

31 



>o Leonard Xaag 



1 (Purchasing Agent) 

Please order the follcwing artioles. 



PURCHASE JiBQUISITIOH 



No. 75 
May~T7~ 



i9?r 



FOR TJSK nV 



PEPT. I ORDER NO. 



3 



DB5CRIPTI0N 



LDATE 
WAK73D 



100,000 Baw itaterlals #1 May 5 



DATE PUf.GHASE 
\QsS>SB^V fl£pER UP. 



Way 1 



1 T 



approved : 



"X" MA!IU7AC!PUiiIMG CGMPAITY 
WASHIHGTON, D. C. 



70 



fo "S" Coppany 



No. 
May 1. 1 922 



Uddreea WaahlnRton. D. C. 
Perms 2 ^ - 10 days 



DESCRIPTION 



100,000 

500 

2,500 



Raw Materials H 

Hammers 

Oil - gallons 



$.50 

1.00 

.40 



$50,000 

500 

l.COO 

$51,500 



You are hereby authorized to furnisli the above material, shipment to 
be. made so material will reach us not later than May 4. 19g2 

vie local delivery 

• "X" Manufacturing Company. 
Per Leor^rd Lang 



MATERIA! RECEIVED REPORT 



Received from "S"* Company 
Address City 
Purchase Order 



...- 69 
May 1. 195^ 



TS- 



100,000 

500 

2,600 



DESCRIPTION 



Baw Materials #1 

Hammers 

Oil - gall ons _ 



Reoeived by 



.l?AW MATERIALS 

Art . tLt . . 7?*":' .^>A *T>'f .\ ¥: .^ 



Card No. .2-.' 

•MiNiM«f-»>r*.*«?.. 



©•RDtHCD 



^^wi^.TslP^g/g ort.T^ 



"ReC£«V£D 



< ss v/ E P 



.o« fyr i», 



rn 



To TAW 
CofeT 



The. chief variations from the simple form of 
purchase order mentioned above are (a) to comhjne 
the purchase order' v/ith the purchase requisition 
(in small concerns), and. (b) to require, before 
issuing, the approval of some one other than the 
purchasing agent (to guard against loss through 
favoritism or graft) . 

After allowing the vendors reasonable time for 
mailing delivery, the purchase department follows 
up all undelivered orders so 'that the factory v/i 11 
no-t be tied up for la-ck of raw material* When the 
purchase department receives its copy of the mater- 
ial received report, it takes its copy of the pur- 
chase order out of the unfilled order file and 
places T.t, together with the copy of the material 
received report and the original purchase requisi- 
tion, in the filled order file. 

r.eceiTing Department 

Wnen a shipment is received, the . receiving de- 
psirtment tskes its copy of the purchase order out 
of the unreceived file, counts the materials re- 
ceived, issues a material received report somewhat 
similar to the form e^ven on page 32, places a 
copy, with the carbon of the purchase order at- 
tached, in its own "received" files, and sends 
the original and three copies to the inspection 
department with the material. In anall concerns 
a copy of the purchase order frequently foTms 
the material received report, a rubber stamp be- 
ing used to give all necessary data spaces. 

Inspection Department 

When the incoming material has been inspected, 
the rejected material is returned to the receiir- 
ing department for deli-veiy to the vendor, and 
the copies of the material received reports are 
corrected and initialed. The material is then 
sent to the storeroom, together with the origin- 

33 



al and two copies of the niaterial received re- 
port. A copy of the material received report is 
placed in the files of the inspection department. 

Stores Department 

When the inspected incoming raw. material 
reaches the storeroom, the original and a carbon 
copy of the material received report are initial- 
ed, the former "being sent to the accounting de- 
partment and the latter to the purchasing depart- 
ment. Then the storeroom files its copies of the 
purchase requisition, purchase order, and materi- 
al received report in its "filled order" file. 

Accounting Department 

When the vendor ships the raw material, he 
sends an invoice, the form of which is somewhat 
similar to the illustration given in Chapter XII, 
which the accounting department files with the 
copy of the purchase order and the original pur- 
chase requisition. When the original material 
received report arrive-s, the invoice is compared 
with the purchase order and the .material received 
report and all extensions checked. Then a vouch- 
er jacket is prepared, covering the transaction, 
and placed in the -'unpaid vouchers payable" file 
togethar with the invoice, material received re- 
port, purchase requisition, and copy of the pur- 
chase order. 

Before the material received report and in- 
voice are filed with the voucher jacket, data 
therefrom is recorded in the raw material ledger. 
If desired, an extra carbon copy of the materiel 
received report may be made to serve as a sub- 
stantiating vouch dr for the entry in the raw ma- 
terials ledger. 

Stores cards are really nothing but subsidiary 
ledger accounts controlled by the raw materials 
account in the general ledger. As ledger accounts, 

34 



the stores cards oould have the form of "T" ledger 
accounts, but, as data as to unfilled purchase or- 
ders, the maximum and minimum stocks authorized to 
be carried, etc., are necessary for manageri *1 pur- 
poses, special forms, somewhat similar to the form 
given on page 32., are used in cost systems. 

Duplicate stores cards are frequently tacked on 
the side of the raw material bins and all purchases 
and issues entered thereon. This practice doubles 
the work of recording the raw material transac- 
tions, but the increase in the accuracy of the 
stores records caused by this duplication is 
frequently worth more than the additional cost. 

An illustrative purchase of raw materials is 
recorded on page 32., as shown in the forms there 
given of a purchase requisition, purchase order, 
material received report, and stores card. The 
recording and the payment of the liability for 
the same purchase are shown in the illustrati ons 
of the vouchers payable register ar^d the cash 
disbursements book given in Chapter I. The in- 
terlocking of the above mentioned forms is il-lus- 
trated in the chart given in Chapter IV. 

Special Material 

Sometimes production orders require the use of 
material, either unv/orked or partly fabricated, 
which cannot be placed in stock because there 
would be no demand for any balance remaining on 
hand. In such cases, only a sufficient quantity 
to meet the requirements of the production order 
is purchased. Of course, this purchase must be 
charged to the production order on v,/hich the 
special material will be used, but there are two 
accounting procedures for accompli shijog this 
charge : 

Method #1. 



Goods in Process-Prime Cost 
Vouchers Payable 

35 



Method #2. 

Raw Materials 

Vouch era Payable 

Goods in Proeess-Frime Cost 
Raw Materials 



The first method does not pass special raater- 
ial through the records of the storeroom, hut 
charges it directly to the cost sheets. The sec- 
ond method records the receiving and issuing of 
all special materials on a stores card designated 
forthe purpose. The first method is'inferior to 
the second in the matter of accountjng control, 
for the stores department can not he held account- 
able for material not passing through its records. 
The second method is, however, more burdensome 
from a bookkeeping point of view than the first 
method, and is therefore seldom used in actual 
practice . 



36 



CHAPTER Yl. 

ISSUING mV PRICING RAW MATERIALS 

Material RequlBitlons 

When raw materials are issued, the following 
entry is made in the requisition journal if that 
boolc is maintained, or in the general .journal: 



Goods in Process-Prime Cost $. 
Raw Materials 



Like all entries, the above entry must oe sub- 
stantiated by a voucher, The need for specific 
knowledge as to the name of the authorizing of- 
ficial, the numbers of the departments and the 
production orders chargeable, and the kind, the 
quantity, and the price of raw materials issued 
has caused the use of formal vouchers called ma- 
terial, requisi ti ons , which var^* in form from the 
illustration given on page 38. When factories 
are not departmentalized, reference to depart- 
ments may be omitted from the form. When mater- 
ials issued are not valued until the end of the 
accounting period ( see the caption "raw materials 
cost" in both Chapter XIV and Chapter XVT), the 
headings and columns for "rate'' and ''amount" may. 
be omitted from the form. When many sizes of the 
same classes of rav; materials are carried, the 
requisition may include a special column headed .- 
"size". In compa;nies employing a large number of 
persons in th6 storeroom and the accounting de- 
partment, additional spaces are sometimes provid- 
ed in the form of requisition for the nsimes of 
the persons who (a)- filjed the order,. (b) posted 
to the stock recoi'ds., (c) posted to cost sheets, 
etc . 

The original and two carbon copies of a matei -" 
ial requisition (unpriced) are sent to the 'store* 
room by th-e factory manager. When properly ini- 

37 



MATERIAL REQUISITION 
Deparxment No. 1 Date May. 1, 1922. Ko . 83 


Job No. 


. Units 


Description 


Rate 


Amount 


60 


1,000 


Materials #1 


f .50 


$500 







r ^ . — - — ^ — ^ — -\- — 1 


. 


Reoeived by N. R. Signed S. T. 



tialed, the original is 
department which prices 
makes the journal entry 
transfer of material on 
and on the cost sheet 
sition in its file, one 
stores department, and 
turned to the issuing o 



sent to tne accounting 
the materials issued, 
shown above, records the. 
the proper stores cards 
and then places the requi- 
oarbon being filed by the 
the other copy being re- 
fficial for his file. 



Material Abstracts 

Material abstracts, sometimes called sujiimaries 
of material requisitions, are used when the requi- 
sitions chargeable to each production order are 
too numerous to be posted individually to the 
oost sheets. Recording the requisitions on th« 
material abstract, a normal form of whitjh is given 
on page 39 , classifies the requisitions between the 
various production orders and at the end of each 
period (usually at the end of each week) the sum 
of the amounts applicable to each production order 
is charged to its cost sheet. Irregular postings 
may be made to the cost sheets of jobs completed 
during the period covered by the material abstract. 
The material abstracts, together with the ac- 
counting department's copy of the substantiat- 
ing material requisitions, are placed in the 
files of the a^cotinting department. 

38 



MATERIAL ABSTRACT 

For week ending May 6, 1922. 



Job #60 



Job #61 



Job if62 



Job f65 



Beg . 



Reg. 



Amount 



*500 
100 
230 

"20) 



Amount 



"1550" 



Reg. 



Amount 



Amount 



8^ 



86 



Material Credit Memos 

When raw material, previously issued to the 
factory, is returned to the storeroom either be- 
cause the material is defective or because too 
much material has been issued, the following en- 
try would be made in the returned material jour- 
nal,' if that book Is maintained, or in the gen- 
eral' journal: 



Raw Materials I 

Goods in Process-Prime Cost 



Such entriea are substantiated by formal 
vouchers called material credit memos, the nor- 
mal form of which is given on page 4Q, The ma- 
terial credit memos are subject to practically 
the same variations as the material requisitions, 
for the headings "department", "rate", and "amount' 
may be omitted when the factory is not department- 
alized, and when the jnaterials are not priced as 
issued. 

Material credit memos, and copies thereof, are 
usually printed on distinctively colored paper. 
The original material credit memo and two carbon 
copies (unplriced) are sent by the factory manager 
to the storeroom with the returned materiail . When 
properly initialed, the original is sejit to the 
accounting department which prices the laaterial 
returned, makes the journal entry shown above, re* 
cords the transfer of material on the cost sheet 

39 



MATERIAL RETQMED MEMO 
Prom Dept, No._J, Date May 6. 1922, 



No. 24. 




Heasons: Hot needed. 



Received "by^ 



U. E. 



Signed_ 



S. T. 



of the produotion order affected and on tJie prop- 
er .stores oard and then plaoes the memo in its 
file, one carbon being filed by the stores depart- 
ment, and the other oopy beinR returned to the is- 
suing official for his file. 

Returned Purchases Memos 

When raw material, the receipt ot "^ilon has 
previously been recorded, is returned to the ven- 
dor, the following entry is made .in the general 

^ ournal : 



Vouchers Payable 
Raw Materials 



Such entries are substantiated by formal vouch- 
ers called "returned purchases memos", the normal 
form of which is given on page 41. The heading 
"reasons" is very important, and detailed data as 
to the causes of the rejection, if the material is 
faulty, should be given. 

Returned purchases memos, and copies thereof, 
are usually printed on distinctively colored paper. 
The original returned purchases memo and thiree 
carbon copies inpriced) are sent by the stores- 
iceeper to thtp slriipping department with the material 

40 



RETURIfED PURCHASES UmO 
Vendor "3" Company Date May 11. 


1922. ITo. 9 


PurGiiase 
Order 


Units 


■ 
Description 


Rate 


Amount 


70 


10 


Raw Material #1 


$.50 


|5 


Reasons : 


'■"1 
Too brittle . 


~' 








Approved C. 


D. Simed 


A. C,. 











to be returned. When properly initialed, the orig- 
inal is sent to the accounting department which 
prices the material returned, makes the journal 
entry shown above, records the transfer of ma- 
terial on the proper stores card, and then 
places the memo in its file, one carbon being 
sent to "the purchasing department which files 
it with, its copy of the original purchase orde^, 
■one copy being filed by the shipping department, 
and the other being returned to the stores- 
keeper for his -file. 



Material Costs 



Theoretically the costs, of the. rav/ materials 
include the invoice prices, freight-in, and the 
expenses of the purchasing and stores depart- 
ments. Frequently the freight-in costs are not 
determinable for quite some time after the re- 
ceipt of the goods. The distribution of the 
freight-in and material overhead over the numer- 
ous varieties of material; is also very burden- 
some. The 'difficulties of prorating the freight- 
in and material overhead usually causes the mater- 
ial to. be recorded at ~ invoice cost and the other 
material costs to be treated as general factory 
overhead 

Eometimes the freight-in cost is such an im.- 
41 



portant -item, however, that it is imperative to 
charge it to the different kinds of materials. 
This oan be done by having a column for freight- 
in in the material received report, and then re- 
cording' the sura of the invoiced cost and the 
freight-in on the stores card and in the vouchers 
payable register. 

When the rav; material handled is fairly uni- 
form, the charges for the expenses of the purchas- 
ing and stores departments may be debited to a 
special "stores overhead" account, and then a 
stated percentage of the other costs of the issued 
raw materials charged to the "good's in process" ac- 
count (also to the cost sheets) and credited to the 
"stores overhead" account. 

Pricing Material Issued 

There are two methods of pricing raw materials 
issued, viz., the first- in first-out principle, 
and the average cost. Assume that 1,000 units of 
a certain raw material v/ere received on May 1 at 
$'1 and 500 on May 2 at |.85. If there was no ini- 
tial inventory, an issue of 1,E00 units on May 3 
would be valued at $1,170 ((1,000 X $1) + (200 X 
|.85)) by the first-in first-out method and at 
$1,140 (1,200 X (($l,000f|425) -^ (l,000f500)i) 
by the average cost method. 

The choice between the two methods of pricing 
issued raw materials constrtutes one of the moot- 
ed questions of cost accounting. Frequently sim- 
ilar concerns in the same locality will use' dif- 
ferent methods. In the ma,in, ho'^fever, industries 
using special order cost systems and buying and 
selling on fluctuating markets use the first-in 
first-out method, v/hile those using product 
(process) cost' systems use the average cost meth- 
od. The first-in first- out method gives more 
nearly absolute coats than the average cx^st meth- 
od, but, as it requires keeping the materials by 
lots, it Is the more expensive method to operate. 
42 



The mathematical difficulty of an occasional 
requisrtion priced at two figures for the same 
material under the first-in first-out princi- 
ple is more than offset by the decimals which 
must he handled in order to maice the inventory 
balance under the average cost method. 

Damaged Material 

V/hen raw material is damaged or becomes de- 
preciated in thQ storeroom so that it is not 
fit for its original purpose, it is taken out 
of the raw material bins and placed among the 
scrapped stores, the transfer being recorded on 
the subsidiaiy- stores records. The entry for 
the transfer. 'v\*iich is made in the general jour- 
nal, is: 

Scrapped Stores (for 

original cost value) |l,000 
Raw Materials ^1,000 

When the scrapped stores are sold, the entry is: 

Gash $800 

Manufacturing Expense 200 

Scrapped Stores $1,000 

Sometimes the scrapped stores are used in 
production, but, in such cases, they are charged 
to the factary at their depreciated value. 

Verification of Inventories 

The math 00 of debiting the raw material ac- 
count with ai-i- receipts and crediting it with all 
issues, causes the balance of the account- to be 
the inventory of the stores on hand. This book 
or pe^rpetual inventory must be checked from time 
to time by physical inventories. As the stores 
oards show the balances of the various kinds^ of 
stores, this verification can be made far each 

43 



Icind of material when the atoci^ of that oomniodity 
is lov/. Frequently space is provided on the 
stores cards for the dates of these verifications 
and for the initials ofthe officials responsible 
f r th em . 

When the stores consist of bulky slow-moving' 
CO mmo di tj es , physical inventories are some^times 
impracticable. In such cases it is customary to 
credit the account with a small percentae^e over 
the cost of the actual number of units issued in 
order to ta^:e care of contingent losses. 

Valuation of Inventories 

Raw materials inventories should be entered 
on the balance sheet at cost or marlcet value, 
whichever is the lov/er. As a maritet fluctuation 
in the prices of previously purchased materials 
shoald not affect the cost of the future produc- 
tion,' the excess of th"e cost over the market 
value should be carried in a "reserve for inven- 
tory fluctuations" account, which should be ad- 
justed at the end of each accounting period by 
an entry- to either the "loss on inventory" or 
"gain on inventory" account ( boxn accounts are 
financial itemsj. Any excess of the market over 
the cost value of inventories should be ignored. 

The operation of the "reserve for inventory 
fluctuations" account, which should be deducted _ 
from the inventory on the balance sheet, is shown 
by the following illustration: 







Raw Material 


Valued at 


Date 


Cost 


Marine t 


December 31, 


1918 


.^100,000 


|;V5,000 ' 


December 31, 


1919 


105,000 


85,000 


December 51, 


1920 


106,000 


75,000 


De c emb e r 31 , 


1921 


104,000 


104,000 


Decemher 31, 


1922 


105,000 


loa.otDO. 



The journal entries affecting the reserve for 
inventory fluctuations assuming there was no 

44 



such account on the boOiCS on December 31, 1918, 
would be: 

D.ec ember 31 , 1918. 
Loss on Inventory $25,000 

Reserve for Inventory Fluct- 
uations $25,000 

December 51 , 1919. 
Reserve for Inventory Fluctu- 
ations $5,000 
Gain on Inventory |o,000 

December 31 , 1920. 
loss on Inveritory 1 11, 000. 

Reserve for Inventory Fluct- 
uations $11,000 

December 31, 1921. 
Reserve for Inventory Fluctua- 
tions $31,000 
Gain on Inventory $31,000 

"December 31, 1922. 
( No entry) 



45 



CHAPTER VII. 
LABOR 
ilmployment Department 

The dutjres of the employment agent consist of 

(a) examining and reoording the previous records 
of applicants for employment, (h) hiring the em- 
ployees, (c) compiling the records of the employ- 
ees with his firm, and (d) discharging the employ- 
ees. The last function is shared with the heads 
of the various departments. 

The records of the employmant department , 
whjch usually consist of a set of cards giving 
the name, number, address, description, previous 
employers, local employment record, and accident 
record of each employee are outside either the 
gerleral or cost accounting books. The records 
are, however, very valuable as a link in the sys- 
tem of internal check on the payrolls, and are 
invaluable to outside auditors who must verify 
the payrolls. 

Cla-asifi cation of Labor 

The labor expended in the fabricating section 
of a factory is divlsable into two groups: (a) 
productive, sometimes called direct, or labor 
applied directly to the productive process, and 

(b) unproductive, sometimes called indirect, or 
labor not thus applied. 

Proration of I^abor 

The direct labor is charged to the production 
orders according to the cost of the labor actu- 
ally expended thereon. If the factory is depart- 
mentalized, the direct labor is charged to the 
various departments before being prorated to the 
product. 

46 



The unproductive labor constitutes a part of 
manufsoturing overhead^ and is prorated in the 
general factory overhead unless the factory is 
departmentalized, in which case the indirect la- 
bor is charged to the various departmental over- 
head accounts on the basis of the cost of the 
indirect labor expended in each department, and 
latex pKo rated over the products. 

Time Tickets 

The 1-abor of ar^ employee on a manufacturing 
process .gives rise to the follov/i ng theoretical 
entries : 

Entry No. 1 
Productive Labor 1 6. 40 

Vouchers Payable $6.40 

Entry No. 2 
G£)ods in Process - Prime Cost .^^6.40 

Productive Labor t6.40 

Like all entries, the above entries must be 
substantiated with vouchers. The need for spe- 
cific knov;ledge as to the names of the employees, 
the numbers of the departments and production .or- 
ders chargeable, kinds of work done, time employ- 
ed, rat^s of pay, amounts due employees, and th-e 
signatures of th-e responsible foremen has caused 
the use of formal vouchers called time tickets, 
which vary" in form from the illustration given 
on page 48, 

There are very numerous variations in the 
form of tim'e tickets. When factories- are not 
departmentalized, reference to the departments 
can be omitted from the form. If overhead- is 
prorated on a "fixed machine" rate (see Chapter 
X) , the time spent on each type of machines 
must be shown on the time ticket. If work is , 
paid on the piece rate basis, the time ticket 
"must show the number of units and rate of each 
kind of product manufactured. A variation fre- 
quently seen is to have spaces on the time tick- 
47 



et for the s 
the time of 
The time 
"rate" and 
proved by th 
"rate" and 
records each 
tipn "payrol 
stract ( see 
the cost she 
Chapter XI 



tamping of the time of" starting and 
stopping by a special factory clock, 
tickets are filled out, except as to 
"arao^ont", by the employees and are ap- 
e foremen. After filling in the 
amount", the accounting department 

time ticket on the payroll (see cap- 
1" below) and -on either the wages ab- 

-ption "wages -abstract" below) or 
ets (see caption "cost sheets" in 

and then files it. 



TIME TICKET 
Fame John Abu ITo . 1 Date May 1 19 22 


Dept.l 


Order 


Description 


Eourd 


Hate Amount 


1 


60 


Running Drill #1 


L_8_j 


$.80 f6_.40 


Approved X.Y. Signed A.M. 



Wages Abstracts 



Wages abstracts are sometimes used when the 
time ticicets chargeable to each production order 
are too numerous to be posted individually to 
the cost sheets. Recording the time ticicets on 
the wages abstract, a normal form of which is 
given below, classifies them between the pro- 



WAGES ABSTRACT 



For weeic ending May 6 192^2 



Iob.#6Q 



Job #61 



Job #62 



$4.80 
4.20 



_Job#63 



$6.40 
6.00 



^6.40 
5.60 



15.60 
4.80 



5.00 
S340.00 



5.00 



.|5,660.00 



6.00 

$17,000.00 



&.50 

115,000.00 



Approved 



X.Y. 



Signed 



A.B. 



48 



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duotion orders, and at 
the end of each period 
the sum of the amounts 
applicable to each pro- 
duction order is posted 
to its cost sheet. Ir- 
regular postings may "be 
made to the cost sheets 
of the ^obs completed 
during the period cover- 
ed by the wages abstract. 
The wages abstracts, to- 
gether with the support- 
ing time tickets, are 
placed .in the files of 
the accounting department 
as substantiating/vou- 
chers for Entry No. 2 
above. If desired, an 
additional column can 
be inserted xinder each 
production order to 
record the numbers of 
the employees. 

Payroll 

Before the time tic- 
kets are turned over to 
the cost clerics for re- 
cording on the cost 
sheets or on the wages 
abstract, data there- 
from is entered on the 
payroll, a model form 
of which is given below^. 

The payroll some times 
records- the daily credjita 
to the employees in hours 
and then multiplies the 
total of the hours by the 
hourly rate • If. the 
. factory is departmental- 

49 



ized the direot and indirect charges are 3ud- 
divided to show the amounts applicable to each 
department. If one payroll is made for the 
whole company, special columns for "selling 
expense" and "administrative expense" are neces- 
sary. 

The payroll, v/hich is the substaiitiating 
voucher for Entry No. 1 above, is usually record- 
ed in the vouchers payable register (see illus- 
tration of vouchers payable register given in 
Chapter I ) . 

4ccrued Payroll 

Accrued payroll is accounted for in a cost 
system in the same manner as in a commercial sys- 
tem, i.e., the accruals are usually booked at 
the end of one period and written off at the 
start of the follov/ing period. The amount of ac- 
crued wages payable is ascertained by a sub-total 
of the amounts shown on the usual v/eekly payroll 
form. The entries for a daily payroll of |l,000 
direot v/ages and $150 indirect wages for the v/eek 
ending March 4, 1922, v/ould be as follows, if the 
wages v/ere paid weekly and the books closed at 
the end of each month: 

February 28, 1922. 
Productive Labor |2,000 

Manufacturing Expense 300 

Accrued Payroll |2.300 

March 1, 1922. 
Accrued rayroll 2,300 

Productive Labor 2,000 

Manufacturing Expense 300 

March 4, 1922. 
Productive Labor 6,000 

Manufacturing Expense 900 

Vouchers Payable 6,900 

Another method of accounting for the payroll 
50 



is to record it in the ''aoorued payroll" account 
as it accrues, regardless of accounting periods, 
and then to close the "accrued payroll" account 
into the ."vouchers payable" account vvhen the pay- 
roll is paid. By this method the above illustra- 
tion would be recorded by a daily entry of, 

Productive Labor §1,000 

Manufacturing Expense 150 

Accrued Payroll |l,150 

and an additional entiy on March 4 of. 

Accrued Payroll ^6,900 

Vouchers Payable $6,900 

Wage Systems 

While the choioe of wage system is primarily 
within the duties of the factory management, the 
cost accountarft must be familiar with the various 
systems and the effect each has upon costs. 

Hourly Rate. The hourly rate is a flat rate 
per hour regardless of output. This method has 
the advantage of being the easiest smd cheapest 
to operate, but depends upon the foremen to get 
a full day's worlc out of the employees. 

Piece Rate. The piece rate is a flat rate 
per unit of output. It tends to lessen the sup- 
ervision of employees but to increase the in- 
spection of output. As the method gives the an- 
ployees the full benefit of the extra production 
except for the saving in overhead, it v/ill not 
lower costs much unless the overhead is very high 

Differential Hate. The differential rate is a 
fluctuating rate per unit of output, the rate va- 
rying directly with the number of units of output 
produced in an hour or a day. The differential 
rate has "&ie same effect on th6 inspection of out- 
put as the ordinary piece rate. As the differen- 
tial rate actually increases the unit labor cost, 
it can only be used where the overhead is extreme- 

51 



Premimn Plan* The premium wage plan is a ilat 
rat© per hour plus extra pay for the time saved; 
the time saved equals the differenoe "between the 
standard and actual time. The premium plan tends 
to reduce the unit labor cost as the workmen usu- 
ally get approximately one-half the regular hour 
rate for the time saved. As the plan speeds up 
prodUGt/ion, it reduces the unit overhead cost. 

Bonus Plan. The bonus wage plan consists of a 
guaranteed hourly rate plus a fluctuating bonus 
in the shape of an increase in the hourly rate as 
the output is increased, i. e., the wage rate per 
hour increases directly with the number of units' 
of output produced -in an hour or a day. The bonus 
plan decreases both the unit labor and unit over- 
head costs of the output. 

Effloi ency Plan. The efficiency plan consists 
of a guaranteed hourly rate plus a fluctuating 
bonus in the shape of a percentage of the total 
wage based on the regular hourly rate; the bonus 
increases with the efficiency of the employee, no 
bonus being given unless the anployee reaches an 
efficiency percentage in excess of 66 2/3. The 
effioi-enoy plan decreases, both the unit labor and 
umi't overhead costs of the output. 



CHAPTER VIII 

OVERHEAD 

Allocation of Expenses 

The allocation of expenses between the fabri- 
cating, selling, administrative, and financial 
departments of a manufacturing company is of vit- 
al importance. As is shown by the chart under 
the caption "icinds of cost" in Chapter I, the 
oost of production includes only raw materials , 
productive labor, and the overhead of the fabri- 
cating section. If other outlays are included, 
in factory cost, the cost statistics are practi- 
cally useless for managerial purposes, and the 
goods in process and finished goods inventories, 
which would be valued at higher cost figures, 
are inflated. 

In making the allocation between, the depart- 
ments, all direct charges, like factory supplies 
to the manufacturing department and salesmen's 
salaries to the sales department, should be deb- 
ited to the departmental overhead accounts in- 
stead of the general overheacT account. The items 
that can not be so allocated should be p-ro rated 
as fairly as possible, the basis used. depending 
on the nature of the item, e. g., rent could be 
prorated on the basis of floor space, if proper 
allowance is made for especially favorable loca- 
tions, while officers' salaries could be prorated 
on the basis of the time spent in each department. 

Service Departments . 

Factory overhead is frequently prorated over 
the various factory departments, machines, and 
manufacturing processes. In such case's, direot 
burden charges are made to the departments, ma-: 
chines and processes- concerned, and the other 
items are oharged to general factory overhead 
arid later, prorated as fairly as possible.. 

53: 



The wide range in the nature of factory over- 
head item« makes it frequently impracti cable to 
prorate each item separately. This difficulty 
has induced the use of service departmental ac- 
counts, v/hich are charged for the outlays per- 
taining to each service department, and credited 
for the prorations to the operating departments, 
machines, and i::£Lnufacturing processes. The 
charges to the service departmental accounts are 
sometimes classified into three groups, (a) con- 
trollable, (b) predetermined, and (c) apportioned 
as this division focuses the attentj on of the ex- 
ecutives upon the elements wherein economies are 
possible. The list below names the ordinary fac- 
t-ory service departments, and shows the detailed 
expenses for one of them* 

Service Departments 

(a) Repairs 

(b) Power 

(1) Controllable 

(A) Salaries 

(B) Supplies 

(C) Fuel 

(2) Predetermined 

(A) Depreciation 

(B) Insurance 

(C) Taxes, etc. 

(3) Apportioned 

(A) Water Expense 

(B) Gas Expense, etc. 

(c) Building and Occupancy Expense 

(d) Lighting Expense 

(e) Heating Expense 

(f) Transportation Expense 

(g) General and Office Expense 

Depreciati on 

As is mentioned in Chapter I under the cap- 
tion "relation to general accounting", the im- 
portance of depreciation forces the use of a re- 
64 



serve for depreoiation and frequently induces 
the use of plant ledo'ers. The acoounting for 
depreciation is so elementary that it causes 
little trouble, but the choice of a method of 
calculating depreciation and the computation of 
the charge after the method has been chosen are 
very difficult. 

Fortunately, the cost accountant usually can 
assume that the fixed assets will not be sold 
aiid he therefore does not need to worry about 
making the theoretical depreciation approximate 
the actual depreciation. This enables him, if 
he uses a reserve for repairs, to discard the 
'^constant percentage on diminishing base" and the 
"sun of the digits" methods, which have the very 
real disadvantages of being complicated and of 
penalizing the early years, when profits are lie 
ble to be low, in favor of the later years. 

The cost accountant can usually assume that 
the replacement of the fixed assets will be made 
fairly uniformly, so he can discard the "sinking: 
fund" method of calculating depreciation. As the 
cost accountant, v\^iether or not he believes inter- 
est to be a coat element, does not Y;'ant interest 
to be included in the depreciation charge, he can 
ignore the "annuity" method. Both the "sinking 
fund" and "annuity" methods are very complicated, 
and have the added disadvantage of increasing the 
depreciation charge with the passing of the life 
of the asset, a practice which is in direct oppo- 
sition to the ratio of the decrease in the sell- 
ing value of th& -assets due to actual depreciation. 

Practically all cost accountants use the 
''straight line" method of calculating depreciation, 
which makes the periodic charge equal the quotient 
of the excess of the cost over the scrap value of 
the asset divided by the number of periods in the 
asset's service life. This method is the simplest 
to operate and gives fair accuracy, if due allow- 
ance is made for idle- and over- time. 

If there are valuable assets whose total ser- 
vice hours or total service output can be estimat- 
55 



ed fairly aoo-urately, the depreciation thereon 
may he prorated to the periods hy the "service 
hours" and "service output" methods, i. e., each 
period charged with that proportion of the total 
loss due to depreciation as that period's total 
service hours or service output is to the estimat- 
ed grand totals. For ordinary cases, however, the 
"straight line" method is adequate. 

A3 the "straight line" method of calculating de- 
preciation is in almost universal use, the other 
methods have only theoretical interest to most cost 
accountants. The various methods are not fully 
discussed in this volume, as they usually -are ex- 
haustively studied in the courses in general acr 
counting theory. Students wishing to make- a spe- 
cial study of the methods used in calculating per- 
iodic depreciation charges are referred to Saliers' 
"Principles of Depreciation," Kester's- "Accounting 
Theory and Practice, Volume II" (Chapters IX and- X), 
and Newlove's "G. P. A. Accounting, Volume I" (Chap- 
ter XV).. 

Repairs . 

The fact that repairs do not occur uniformly 
over the accounting periods in factories of ordi- 
nary size, makes it advantageous to establish a 
reserve for repairs hy the following entry: 



Manufacturing Expense f . 

Reserve for Repairs 



When actual outlays are made for repairs, the 
entry is. 

If repairs are made hy factory employees: 

Reserve for Repairs I-..-. 

Goods in Process-Prime Cost 
Manufacturing ExDense 



5j& 



If repairs are made by outsiders 

Reserve for Repairs 
Vouchers Payable 



Factory Supplies 

Factory supplies are sometimes charged direct- 
ly to factory overhead or to departmental over- 
head, if the factory is departmentalized. As 
this method does not keep a control on the facto- 
ry supplies, they are frequently handled the 
same as raw materials, viz., the factory supplies 
are delivered to the stores department, recorded 
on ledger cards controlled by the factory supplies 
account in the general ledger, and issued as a 
charge to factory overhead on requisitions. 

Tools 

Depreciation is usually ignored in the valua- 
tion of hand tools, for, when the periodic phys- 
ical inventory is valued at cost and all losses 
so shown are de-bited to the "manufacturing expense" 
account, the valuation is substantially correct. 
There are two other methods of handling anall tools, 
(a) to carry them as an asset at a conservative val- 
uation for an ordinary stock and then to charge 
tools issued to the "manufacturing expense" account, 
and (b) to charge tools issued to "manufacturing ex- 
pense" account end to ignore them at inventoiying 
time . 

Patterns. Lasts. Models 

As the calculation of depreciation on patterns 
lasts, molds, dies, drawings, electrotypes, wood 
outs, forms, models, etc., is greatly complicated 
by the factor of obsolescence, they should be con 
aidered as a cost of the particular ;]ob for whicdi 
they were made, unless they will, in all probaTsil 
ity, be used agaip., in whioli oase they can be Qajy 

67 



italized, subject to a very liberal periodjo depre- 
ciation rate. 

Prepaid Charges 

Fire insurance and the other prepaid charges 
are handled in cost accounting just as they are in 
general accounting. It seems preferable to set up 
an asset account when the outlay is made, and then 
to write it off the account by periodic install- 
ments . 

Accrued Charges 

Accruals are accounted for in a cost system in 
the same manner. as in a commercial system, i. e., 
the accruals are booked at the end of one p'eriod 
and written off at the start of the following per- 
iod . 

Manufacturing Expense Account 

The "manufacturing expense" account is usually 
debited v;ith the various items of factory overhead 
and credited with the overhead applicable to the 
goods completed. The balance of the account theo- 
retically should be exactly equal to the amount of 
the overhead applicable to the goods in process 
(found in the same way as the amounts applicable 
to the finished product). Practically it is im- 
possible to foretell the amounts of the manufactur- 
ing expense or of the goods completed or partly 
completed. The balance of the "manufacturing ex- 
pense" account must, therefore, be adjusted to the 
amount of overhead applicable to the goods in proc- 
ess by either (a) a debit or credit to "profit and 
loss", (b) the creation of a deferred charge or a 
deferred credit to income, or (cj the recalculation 
of the costs of the finished and partly finished 
products. Method (c) is the most accurate but is 
too burdensome to be used unless the cost figures 
are very inaccurate. Method (b) is theoretically 

58 



faulty in that the josts in the future period 
should not be affecied by mistakes made in the 
past. Method (a) is the one usually employed as 
tlcie misstatement of the profit for the period by 
the difference betv/een the real and theoretical 
overhead in the finished goods and goods in proc- 
ess inventories is negligible, if the cost system 
is well operated. 

Reserve for Interest 

Even if interest on investment is accepted as 
a cost element (the arguments for and against are 
given in Chapter XIV) , there remains the "difficult 
ty of handling the interest element so that the in- 
ventories will not be inflated. This can best be 
done by establishing a reserve for interest when 
the interest is charged to the "manufacturing ex- 
pense" account, and then at the end of the period 
to reduce this reserve to the amount equal to the 
interest charge contained in the inventory of fin- 
ished and partly finished goods by crediting the 
"interest on investment" "account , a financial in- 
come item. 

The operation of the "reserve for interest" ac- 
count, which should be deducted from the invento- 
ries on the balance sheet, is shown by the follow- 
ing illustration: 





Interest Included in 


Year 


I'actory 
Overhead 


Pinal 
Inventories 


1920 
1921 
1922 


^100,000 
100,000 
100. 000 


§5,000 

12,000 

8.000 



Assuming no interest was charged to factory 
overhead before 1920, the entries v^ould be: 



During 1920 
Manufacturing Expense 
Reserve for Interest 

59 



^100,000 



$100,000 



De-o^aber 31,1920 
Reserve for Interest |95,000 

Interest on Investment |96,000 

During 1921 
Manufaoturing Expense flOO.OOO 

Reserve for Interest $100,000 

DeoOTiber 31,1921 
Reserve for Interest' |93,000 

Interest^ on Investment |93,000 

During 1922 
Manufacturing Expense $100 ,.000 

Reserve for Interest f 100, 000 

Deo^ber 31,1922 
Reserve for Interest $104,000 

Interest on Investmen^t |104,000 



60 



CHAPTER IX 

DISTRIBUTION OF OVERHEAD 

Importanoe of. Ghoioe of Method 

The importance of the choice of the method of 
prorating overhead to the producjtlon order is 
seldom realized. The difference made by this 
choice of methods is shown "by the illustration 
on page 62. The calculation of the amounts 
chargeable as overhead under each method to the 
produc-tion order is explained under their respect- 
ive sub-captions for "calculation" and "applicatipn* 

Material Cost Method 

Calculation. The "material cost" method calcu- 
lates the percentage that the overhead of the previ- 
ous period is of the cost of the raw material is- 
sued during that period. In the following illustra- 
tion, the 1921 burden is 50 ( o .000 -r 10 ,000) per 
cent of the 1921 material cost. 

Application. The "material cost" methbd multi- 
plies the cost of?, the materials issued for a produc- 
tion order by the average percentage the .burden 
costs are of the n^ate'rial oosts during the previous 
period. In the follov/ing illustration, the 1922 
burden applicable to Job No. 9 is $1.50 ($3.00 Z .50) 

When Used. The "material cost" method is rarely 
used for complete factories as it presupposes that 
the material element is the predominating factor in 
production. The method is sometimes used in depart- 
mentalized factories, being especially successful in 
prorating the overjiead of the stateroom to the pro- 
duction orders using the is_sued materials in ordina- 
ry fagtoTi-es and in distributing the seasoning costs 
in drying de par tm&nts of lumber manufacturing aon-^ 
oerns. 

Advantages and "Disadvantages. The "material cost 
method has the advantage of prorating overhead on a 
basis laihich is compiled in oollecting liie prime cost 

61 



0) 

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45 



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O 00 < 



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O I 



H > 

CM U 



o o 

O Q O O 

O O O O 

* "^O o 

O LO * •> 
rH rH u^ O 



o o 

O O 
O O 



o -P w 



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chargeable to the production 
order. The method has the 
disadvantage of being applica- 
ble in only a few cases, as 
overhead depends much more 
frequently upon the labor and 
machinery elements than upon 
the raw materials. 

Labor Cost Method 

G a leu la ti on. The '^labor 
cost" method of prorating over- 
head to production orders cal- 
culates the percentage that the 
overhead of the previous period 
is of the cost of the product- 
ive labor during that period. 
In the illustration at the left, 
the 1921 burden is 33 1/3(5,000 
f 16,000) per cent of the 1921 
direct labor cost. 

Application. The "labor 
cost" method multiplies the cost 
of the productive labor expended 
on a production order by the av- 
erage percentage the burden costs 
are of the productive labor coats 
during the previous period. In 
the illustration at the left, the 
1922 overhead applicable to Job 
No. 9 is $1.60 ($4.80 "X .33 1/3). 

When Used« The "labor cost" 
method is very frequently used in 
factories v\^.ere the labor is the 
predominating factor in produc- 
tion. The method gives accurate 
results only in the event that 
there is unifoimity within the 
factory as to (a) the kinds of 
goods produced, (bj the wage scales, 
(c) the tijtie consumed in making the 
6Z 



different '>in:ts of product, and (d) the cost and 
running expenses of the machinery used. 

Advantages and Disadvantages. The ''labor cost" 
m e thod,' like the "material cost" me th o d , ha s th e 
advantage of prorating overhead on a "basis which 
is compiled in collecting the prime cost charge- 
able to the job. The method is subject to the 
disadvantage of being applicable only in factories 
in v^ ich both the nmchinery and material are rala- 
tively unimportant and the wage scales are uniform. 

Prime Cost Method 

Calcul&ti on. The "prime cost" method calculates 
the percentage that the overhead of the previous 
peilod is of the cost of the raw materials issued 
and productive labor expended during that period. 
In the illustration on page 62^ the 1921 burden is 
20 (5,000 T 25,000) per cent of the 1921 prime cost. 

Applicati on. The "prime cost" method multiplies 
the prime costs chargeable to a production order by 
tt-e average percentage the burden costs are of the 
prime costs during the previous period. In the il- 
lustration on page 62, the 1922 burden applicable 
to Job ITo. 9 is $1,56 ($7.80 X .20). 

When Used. The "prime cost" method is seldom 
used in factories as it presupposes that (a) the 
material and direct labor are about equally impor- 
tant elements in production, (b) the machinery is 
relatively unimportant, and (c) the cost and running 
expenses of machinery and the wage scales are uni- 
form. 

Advantages and Disadvantages . The "prime cost" 
method , like the "material cost" and "labor coat" 
methods, has the advantage of prorating overhead 
on a basis which is compiled in collecting the ma- 
terial and productive labor costs chargeable to the 
production order. The method allows for the fact 
that overhead is connected with rav/ material, but 
the method has the disadvantage of being applicable 
in only a few cases as the overhead connected with 
raw material is seldom equal to that caused by the 

63 



productive labor, and as overhead oauaed by the ma- 
Ghinery is usually too important to be prorated on 
the basis of the material and direct, labor oosts. 

Labor Hour Method 

Caloulation. The "labor hour" method of prorat- 
ing' overhead to prodmotion orders oaloulate.s a lab- 
or hour burden rate by dividing the overhead of tb.e 
previous period by the number of labor hours during 
th^t pe?:iod. In the illustration on page 62, the 
1921 burden rate is $,E5 (|5,000 -7-20.000) per lab- 
or hour. 

Application, The "labor hour" method multiplies 
the number of labor hours expended on a production 
order by the average labor hour burden rate for the 
previous period. In the illustration on page 62 
the .1922 burden applicable to Job N-a. 9 is fl,75 
(7 X $.25}. 

When Used. The "labor hour" method presupposes 
that (a) the labor is the dominant factor in produc- 
tion and (b). there is a marie ed uniformity as to the 
kind of goods produced and as to the, cost and run- 
ning expenses of the machinery used. 

Advantages and Disadvantages. The "labor hour" 
method has the advantage over the *^labor cost" 
method in that most items of factory overhead. ac- 
cumulate according to time and have only an -inci- 
dental connection with the wage scales. Some i* 
tems even have a tendency to vary inversely with 
the rate of wages, i. e., repairs and superintend- 
ence. The "labor hour" method has the disadvant- 
age of being applicable only' in factories in which 
both the machinery and material elements are rel- 
atively unimportant. 

Sold Hour Method 

C alculatl on. The "sold hour" method of pro rat 
ing'bverhead to produotion orders calculates a 
labor hou.r rate combining direct labor and over- 
head uoats by. dividing the sum of the direct lab- 

64 



or and oYernead c-csts of the previous period by 
the number of labor hours during that period. In 
the illustration on page 62, the- 19E1 combined .di- 
rect labor and overhead rate is $1.00 ((|15,000 +- 
$5,000) -r 80,000) per labisr hour. 

Applioation» The "sold hour" method multiplies 
the number of productive labor hours expended on a 
production order by the combined direct labor and 
overhead rate for the previous period. In tne il- 
lustration on page 62, the 1922 direct labor and 
overhead applicable to Job No. 9 is 17.00 (7 X 
$1.00 )• 

When Used. The "sold hour" method, sometimes 
called the "nev; pay" or the "standard hour" meth- 
od, is unable only under the conditions favorable 
to the "labor cost" -method , viz., uniformity as 
to product, v/age scales, time- of operation., and 
costs and running expenses of machines used. The 
"sold hour" method is especially adapted to the 
printing industry- in v/hich it was developed. 

Advantages and Disadvantag;es. Th'e only advan- 
tage that the "said hour" method has over -the "la- 
bor cost" method is the ease v;ith which the cost 
can be prorated to the production orders. The 
"sold hour" met'nod has the decided disadvantage 
of failing to present the data necessary to anal- 
yze costs satisfactorily. 

Units of Product Method 

G-al cuIa tion. The "units oi product" method of- 
prorating overhead to production orders calculates 
the average cost of burden per unit of product man- 
ufactured during the previous period. In the above 
illustration, the 1921 burden cost per unit of 
product manufaomred is $1,00 ($6,000 -r 5,000). 

Application^ The "units of product" method mul- 
tiplies the average cost of the burden per unit of 
product nmnufaotured by the number of units pro- 
duces on the production order. In the above illus- 
tration 5 the 192E burden applicable to Job #9 la 
$1.00 ($1,00 X 1). 

65 



W hen Used. .The "units of product" method oan 
be used only in industries in vi^.ioh there are out 
few kinds of "oroducts manufactured. As this condi- 
tion is tre prerequisite to the use of the "product" 
cost system (see Chapter XTTI}., which costs less to 
operate than the "special order" cost system wioh 
the "units of product" method of prorating over- 
head the "units of product" method is seldom 
used! It can he used to advantage though in fac- 
tor! as in which the time and method of production 
is nearly constant, but the material costs vary 
so greatly as to preclude the us-e of the "product" 
system of cost accounting. 

Advantages and Disadvantages. The "units of 
product" method, liK:e the "material cost", "labor 
cost", and "prime cost" methods, has the advantage 
of prorating overhead on a basis that does not 
have to he especially compiled for that purpose. 
This ease of operation is more than offset hy the 
disadvantage of be lag applicable only in a few 
cases, and the method is therefore relatively un- 
important. 

Machine Hour Method 

Qalcuiatian. The "machine hour" method of pro- 
rating overhead to production orders calculates a 
machine hour burden rate by dividing the overhead 
of the previous period by the nujnber of machine 
hours during that period. In the above illustra- 
tion, the 1921 burden rate is $.50 (|5,000 -r 10,- 
000) 'per m^achine hour. 

Application. The "machine hour" method multi- 
plies the' number of machine hours expended on a 
production order by the average .machine hour bur- 
den rate for the previous period. In the above 
illustration, the 1922 burden applicable to Job 
No. 9 is $2.00 (4 X |.50) . 

Waen Used. The "machine hour" method can be 
used only in industries in v;hioh the machinery is 
the predominant factor in production, aad in which 
the costs and running expenses of the machines used 

66 



are uniform. The method is frequently used to pro- 
rate the overhead in departments in v^ioh there is 
liitle or no henoh woric. 

Advantages arid Disadvantages. Like the "labor 
hour" method, the "machine hour" method has the ad- 
vantage of prorating overhead on the basis of time 
rather than the cost of a comparatively unrelated 
cost element. The "machine hour" method is usual- 
ly more advantageous than the "labor hour'^ method 
as overhead accumulates with machine hours more 
frequently than with labor hours. The "machine 
h^our" method is subject to the disadvantage of be- 
ing usable only in departments in "v\4iich the costs 
and running expenses of the machines are uniform. 

Combination of Methods 

Since each of the methods of prorating overhead 
to the product requires specific conditions before 
it can be operated successfully, only small facto- 
ries performing a very limited number of operations 
can use one method throughout the entire plant, 
large concerns departmentalize the plant, charge 
the overhead- to the various departments, and then 
prorate the overhead of each department according 
to the method best adapted for the conditions ex- 
isting in that department. 



67 



CBAPTEB X 

BUDGETARY CONTROL OF OVERHEAD 

Budgets 

Paotdry budgets are sGiiedules of estimated 
txpenditures drawn up "by the d e par tmerxt. managers, 
aub-jeot to change by the oo-rp'orate officials and 
directors, v\fcieh are recorded in the accounting 
hooks as limits beyond which the actual expendi- 
tures must not go.' A comparison of the actual 
and estimated expenditures is frequently mads to 
ascertain tjie relative efficiency o-f the varioug 
departments. 

Goods in Prooess - Factory Expense Account . 

Under a budgetary cost system, an account must 
be set up for the schedule of estimates. The nat- 
ure of such en account is shown by the following 
analysis of ttie "goods in process^- factory ex- 
pense" account k 

GOODS m PROCESS - FACTORY EXPENSE 

Debits 
Estiinited total factory overhead for 

peri od |. . . • . , 

Over-pro ration of overhead ^;. . . . ♦ . 



Inventory 

Credita 
Overhead prorated to finished goods 
Inventory. - overhead applicable to 

uncompleted product 
Under-proration of overhead 



68 



Manufacturing Expense Account 

Under a budgetary cost system, the "manufact- 
■uring expanse" account, is operated slightly dif- 
fereritly than under a non-hudgetary system. The 
nature of the ac count .under a budget is shown by 
th6 following analysis; 

MANUFACOUSING EXPEKSE AOCOUmi 

Jiebits 

Actual factory overhead for period | 

Over-estimation of overhead §....., 



C,r edits 
Estinnated total "factory overhead for 
perj od S 

Under-estimati on of overhead I 



Jo.urnalizati on of Budgets 

The accoantjng for factory overhead under a 
budgetary cost system is— shovm by the journal 
entries for liie fb.llowing illiistration: 

Actual factory overhead ^3^02, 000 

Estimated .factory overhead 100,000 

Prime cost of goods completed 360,000 

Prime co s"t "of goods in process 60,000 

Overhead as-.sumed to be 25% of prime 
CO st . 

JOURNAL MT-RIES 

Manufacturing Expense §10£,000 

Youch-ers Payable |102,000 

G G o ds in Pro o e s s - Fa c to r^ 

Expe ns e 100,000 

Manufacturj ng Exp-ense 100,000 



Finished Goods 90,00-0 

Goods in Process-Facto- 
ry Expense 



Goods in Process-Factory 
Expense 
Manufacturing Expense 
Adjustment account 



5.000 



90,000 



2,000 
3.000 



The oalance of the "goods in process-factory 
expense" account of |15,000 ($60,000 X .25) is 
included in the balance sheet as part of the 
goods in process inventory, v;hile the "adjust- 
ment" account is closed into the "cost of sales 
account in the profit and loss statement. 

Fixed Machine Rate 

Calculati on. The "fixed machine" method ot 
prorating overhead. to production orders distrib- 
utes the overhead to the various types of machines 
or manufacturing processes, and then .calculates 
the rate per hour for each type or process by di- 
viding the sums. applicable to each by their total 
ordinary operating time. The detpdled calculation 
of the "fixed" ma chine" rate is shown by the follow^ 
ing i llustrati on :. 





TOTAL 


APPLICABLE TO MACH INS TYPES 




41 


-#2 


P 


Rent 


?5.,000 


|S,500 


$1,500 


$1.0CO 


Li^t 


800 


400 


250 


150 


Heat 


1 . 20.0 


600 


350 


250 


Power 


4,000 


2,500 


1,000 


600 


S-upplies 


2,7^0 


1,320 


940 


460 


Indirect Labor 


5.000 


1.000 


2.200 


1.800 


Total Estimated 








Expenses 


$18,720 


$8,320 


$6,240 


14.160 


Estimated Oper- 










ating H'ours 





20,800 


20,800 


20 ,800 


Estimated Hour- 










ly Rate 





$.40 


$.30 


$.20 



70 



Applicati on* Th e co mp u ta ti o n of th e ov e rh e ad 
applicable to each production order is amde "by add- 
ing the products of the total hours per machine 
type or manufactu-ring process by the hourly' rates 
of the respective types or processes. Ihe. applica- 
tion of the ''fixed machine" rate to a particular 
production order is shown on the illustration of 
a cost sheet given in Chapter XI. 

Under the "fixed machine" rate, the "goods in 
process-factory expense" account may be divided 
into an account for the overhead applioab-le to, 
each machine, type or manufacturing process. Each 
of these accounts would be handled in the same 
way as the "goods in process-factory expense" ac- 
count. The subdivision is sometimes worth the 
added expense it causes, as it tests the acc'uracy 
of the hourly rates of the machine -types or manu- 
facturing processes. 

When Used. While the budgetary system can be 
used in connection v;i th any of the methods of prO' 
rating factory overhead discussed in Chapter IX, 
it is usually connected with the "fixed machine" 
method. The "fixed machine" rate not only presup- 
poses that the machinery is a very important ele- 
ment in the factory, but assumes that there is 
enough difference betv;een the types of m^-chines 
to make it worth while to differentiate between 
them. 

Advantages and Disadvantages. The "fixed ma- 
chine" rate has the advantage of utilizing to the 
fullest possible extent the -accounting principle 
of allocating all .direct overhead charges to their 
origin for the purpose of reducing the amounts 
that must be arbitrarily allocated. It also has 
the advantage of the "simple machine hour" method 
(see discussion in Chapter IX). The disadvantages 
of the "fixed machine" rate are its complexity and 
the work required to record the time spent by each 
type of machine on each production order.. 

Supplementary Rate for Idle Time . 

Calculation. The calculation of the supplement 
71 



ary rate for idle 
of the products o 
tirae^of eaoh rnach 
multiplied by the 
speotive type or 
types or prooesse 
urea used in the 
rate for idle tim 
ceding the period 
The calculation o 
time is shown "by 



time is made by dividing the sum 
f the number of hours of the idle 
Ine type or manufacturing process 

hourly overhead rate of the re- 
process by the number of hours all 
s actually operated. All the fig- 
calculation of the supplementary 
e are those of the period just pre- 

in v/hioh the rate will be applied. 
f the supplementary rate for idle 
the following illustration: 



H U R S" 



OVER-' 

HEAD 

RATE 



TOTAL 
CAPACITY 



AGTU'AL 
OPERATIOi^ 



IDLE 

TIME 



IT4S" 

.29 
.23 



TOTAL 



$430 
232 

506 



Machine Type #1 
Machine Type #2 
Machine Type #3. 

Total 
Operation Hours 
Hourly Rate 



20,800 
20,800 
20,800 



19,800 
20,000 
18,600 
58.400 



1.000 
800 
2,200 



$1,168 
58 400 
$.02 



Applicati on. The product of the hourly supple- 
mentary rate for idle time multiplied by the total 
hours for all machine typas or manufacturing process- 
es pertaining to a production order is added to the 
overhead charged to t?iat produqtion order by the reg- 
ular method of prorating overhead. The application 
of the supplementary rate for idle time on a par- 
ticular- production order is shown on the illustra- 
tjon of a coat sheet gjven in Chapter. XT. 

When Used. While allowances for idle time can 
be m.ade by means of a supplementary rate in connec- 
tion with the "productive labor hours", "simple 
machine hours", and "fixed machine" methods of pro- 
rating overhead, the supplementary rate for idle 
time is most frequently used in connection with 
the "fixed machine" method. 

Ad-vanJtages and Disadvantages. The advantages 
of the supplementary rate for idle titfte is that it 
gives a convenient met/iod for malcing adjustments 
for idle time. The method has the serious defect 

72 



of making the idle time of one period affect the 
costs of the subsequent period instead of the 
costs of the period in v^hiah it occurred, Tlie 
supplementary rate for idle time may, therefore, 
"be used only when the idle time .ia fairly uniform 
"between periods, and is comparatively unimportant 
in amount . 



73 



CHAPTER XI 
GOODS IN PROCESS. 
Controlliiig AcQo^ant 

Under a speoial order system, the "goods in 
ptrooe-ss" account is debited for the manufactur- 
ing outlays and credited with the cost of the 
product completed. The balance of the account 
is therefore the inventory of the uncompleted 
product, the itemized costs of wnich are shov/n 
on the cost sheets. 

The "goods in process" account is sometimes 
divided into the "goods in process - materials", 
"goods in process-labor", and "goods in process- 
overhead" accounts, each account controlling the 
charges in their respective section of the cost 
sheets. As there is little advantage in such 
minute classification, the material and labor el- 
ements, v^ ich are posted daily to the cost sheets, 
are frequently combined into the "-goods in proc- 
ess - prime cost" account, and the overhead, which 
is seldom prorated lintll the completion of 'the 
production orders, is left in the "manufacturing 
expense" account until tiie finished goods are 
transferred into the stock-room. 

Cost Sheets 

"While there is no normal form of a goods in 
process ledger in the same sense as there is a 
normal form of the raw materials and fi ni shed 
goods ledgers, the cost sheets tend 1x) be divid- 
ed into tv/o hoTi zontal divisions , the upper sec- 
tion being subdivided vertically into spaces to 
record (a) materials cost, (b) productive labor 
cost, and (c) data for proration of overhead, 
and the lower section containing a summ^ary show- 
ing the total costs for material, direct labor, 
and manufacturing expense. 

The v^iole upper section of the cost sheets is 

74 





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75 



normally divided- by quite* a nujnba-r of horizontal 
lines. The material; seoti on is frequently subdi- 
vided into oolumns for "date", "requisi ti onrnum- 
ber", and "amount" while, the productive labor 
se.otion is subdivided into oolumns for "date" and 
*'.amount " . The "date" column -of the prd'ductive- 
labor section is frequently -use-d .in connection 
with, the overhead section, v/h ich is. arranged to 
sh.ow the produa'tiye labor hours, total machine 
hours, and process hoxirs under, the productive 
labor hour, ^i^nple machine, and- fixed machine- 
m Q th ,0 ds ■ of -di s tri bail ng oy erh 6ad . I f th e ma t e:r- 
ial cost, productive labor cast', and prime cost 
methods of prorating ov-erhead are used the ove-r- 
head section is usually omitted, and frequently 
the summary of .co^ts (usually vShown in the lov/er 
diviaion) Is inserted in- its place. 

The form of cost sheet given on page 75 is an 
illustration of a form adapt .ed for use when the 
"fixed machine" method of prorating, overhead is 
used. "This form is used in Problems lO-A, 11-A, 
and 12-A. The figures recorded on the illustra- 
tion of a. cost sheet articulate with those on the 
moial form of production order on page 27 , materi- 
al requisition on page 38, naaterlal'-abstract on 
page.. S9 , Tequi siti on ;iournal on page 10., stpre^ 
ledger on page 3.2, returned material memo on. page 
40, returned materials journal or^ page. 10 , time 
ticket on pa.ge 46, wa.ges abstract on page 40, 
production reprort on page. 7 7., finished goods- 
journal on page 10, -and stock ledger on page 85. 

Finishe-d Goods -Production Re.ports 

Under a special order cost system, the comple- 
tion of each production order must be recorded by 
the following entry, which would be made in the 
finished goods journal, if that book is maintained, 
or in the general j-ournal. 

Finished Goods I 

Goods in Proce_3S-Prime Cost 
i/]anufacturi ng Expense 
76 



The substantiating- voucher for this entry is 
tha finished goods produGtien report, an illustra- 
tion of vhloh follows. 



Dept. #1 


PRODDCTICf^ REPORT 
Order No. 60 


No. 50 






PRODUDTION 


COST 


DIBTRIBUTIQN 


. ARTICLE 


UNITS 


HAOJE 


i«^O0NT 


MATERIAL LABOR 1 BURDEN 


Finished Goods #1 


2,000 


$.60 


fcEOO 


#710 


$340 


Li^5£-J 


-^ ^ .— :.-.^^ -.---■■ —--r---^^-^— T— r~==i 


Reo&iv«d b^: T, B. Signed: W. X» j 



The factory fojremart soaads the- original and three 
carbons -of the report {filled out only as to pro- 
duction) v/ith the finished .product to the inspec- 
tion department., which. If the product is satis- 
factory, initials all papers and sends them, ex- 
cept a carbon copy- which it places in its own 
'files, with the product to the stockroom. The. 
sto clcic-eeper then signs the jBpers, returns a copy: 
to the jfa c to ry f-o reman, places a carbon in his 
own file, anii s,ands the original to the account- 
ing department. The accounting department com- 
pletes the cost sheet, prices the firnshed goods 
■on th-8 production rapart, maxes the entry shown 
aboys^ records the transfer in the finished goods 
ledger (stock cards), and fil-e^ the cost sheet, 
prodtctlon report, and its copy of the pro due-, 
tioh order. 

The two most- important variations from the 
illus.tration given of the rinlshed goods produc- 
tion re-port are (a) to insert columns to classi- 
•-fy the product into defective and good units, 
and (-b) to omit all- the columns for the costs of 
production. Both variations are especially prev- 
alent in continuous product Indus tries ,= variation 
(a) being use'd in connection with the defective 
work report t see Chapter Xllj , and variation (b) 
being neceasitated by the prac-tice of not valuing 
the. finished goods produced until the. Bnd of the 
accouutjLijg period., 

17 



Invento.rl ea 

Under a speoial order non-budgetaiy oost sys- 
tem, the book inventory of the goods in process 
IS the sum of (a) the balance of the "goods in 
process - prime cost" account and (b) the amount 
carried in the "manufacturmg expense" account 
which pertains to the uncompleted product. The 
amount (ah above agrees with the sum of the raw 
material and direct labor charges on the cost 
•sheets of the uncompleted production orders. Th-e 
amount (b) above is calculated on the same basis 
as is used in prorating overhead to the produc- 
tion order on their completion. For instance, 
if 10 per cent of the prime cost is added to the 
raw material and productive labor costs of com- 
pleted jobs, the same percentage of the prime 
cost of the uncompleted jobs, as shown by their 
cost sheets, would be included in the goods in 
process inventory. The entries for the overhead 
in the goods in process are: 

At end of accounting peri od 

Goods in Process ^...... 

Manufacturing Expense $ 



At start of next accountin-g period: 

Manufacturing Expense $ 

Goods in Process $ 

Of course, both of these entries can be avoided 
by adjusting the final balance of tne manufactur- 
ing account so that it exactly equals, the over- 
head belonging to the uncompleted product and 
then including this airiount on the balance sheet. 
The book inventory of goods in process must, of 
course, be verified from time to time by taking 
a physical inventor^\ which values the uncomplet- 
ed units at cost (estimated) figures. 

Under a product (see caption "departmental ac- 
counts" in Chapter XIII) or an estimating cost 
system (see caption "goods in process" in Chapter 

78 









i% 


2 % 

1 f^ -^* 




: 
0. 


UJ 





■^ 


hv- 





O. 


< 

-J 
< 


a 




p 





O 




G\ 




^ 


ZT 


t. 


Z ^ 


r 


Q 


ft 

o 



r 


3 

T — ■ 


a 


Wc>j^ 


>< 
< 

2: I 


z 


h 


a 






UJ 


00 


>9 


^0 








^ 




(>^ 


h 






< 






2 

^ 



en' 


f^ 




















'*,«>' 


«Q 


1- 

LU 






S^ 










v5 


2: 

P- 





ui 
> 


^ 




^ 
V 
















2 
" 3 


W 




Q^ 




^ 













o«'o 


Cie 









Ef^ 




Ui 


•i 





.0" 









q 


w> 


P^g. 


^ 









i-Q 




UJ 


^ 




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r 



79 



ZV and Chapter XVI) , the 
inventory of goods in 
process is usually oal- 
Gulated by valuing the 
physical inventory of the 
number of units of goods 
in process in a more or 
less arbitrary manner. 

Component. Parts 

Sometimes partially 
completed goods at a cer- 
tain stage of manufacture 
form the basis for diver- 
gent classes of products • 
Units at these stages of 
production, called compo- 
nent parts, are frequent- 
ly made on special produc- 
tion orders, placed in the 
storeroom, and requisition- 
ed when needed. For in- 
stance, yarn is a component 
part in cloth mills inanufac- 
turi ng their own yarn, be- 
cause yarn of a given size 
and quality is used in mal?:- 
ing many kinds of cloth,, and 
indeed, can be sold as yarn 
on the open markiet. 

Units of component parts 
may be carried through the 
factory without being sepa- 
rately accounted for as com- 
ponent parts. V/hen compon- 
ent parts are differentiat- 
ed from the ordinary goods 
in process, their manufact- 
ure is authorized on produc- 
tion orders, their costs cal- 
culated on cost sheets, their 



transdfer to the storeroom reported on produotion 
reports and recorded oil subsidiary ledger oards , 
and their issue to the factory authoriz.ed by requi- 
sitions. These forms oan he exactly similar to the 
regular forms of the same type, hut they are usual- 
ly differentiated hy having special headings and by 
being- printed on Specially colored paper. 

Th® form of subsidiary ledger used in Problems 
13-A and 14-A for component parts, an illustration 
of v/hioh is shown on page 79 , is the same as the 
subsidiary ledger for finished goods except for the 
heading and the title of the left column under the 
caption "issued" « The general ledger account enti- 
tled ''component parts" is the controlling account 
for these ledger cards. The balance of this account 
which should agree with the aum of the balances on 
the ledger cards, represents the book inventory of 
the component parts in the storeroom. Like all book 
inventories, the inventory of component parts must 
be verified from time to time with a physical inven- 
tory of the units valued at cost. 

By -Fro ducts 

The accounting for by-products is given in the 
following quotation from Newlove^s "C . P\ A. Ac- 
counting", Volume I. 

"A by-product is a secondary commodity of value 
incidental to the manufacture of the primary prod- 
uct -of a facto ly.. Where no -di-rect labor is applied, 
after the separation from the main product, the by- 
product is classed as waste, or scrap, or offal, 
and i^ disposed of at the best going price obtain- 
able, the amount realized th-erefor being credited 
to the material, account involved, if both the prim- 
ary and secondary nmterial are clearly defined. 
When, however, the practice is to accumulate vary- 
ing percentages of v/aste of a given kind and grade, 
such as borings, turnings, etc., and no economic 
purpose would be served by the application to mater- 
ial costs of such salvage prices obtained, then ther 
credit is passed to the overhead accounts of the de- 

80 



partments oontributing suoh secondary commodities. 
In the latter case, statistics are compiled arid the 
volume of v/aste for given periods is compared v/ith 
the volume of raw material put into process. 

Where direct labor is applied, the secondary, 
commodity is called a "by-product. No fixed rule 
for all classes of production can be formulated 
as to the basis for levying charges and passing 
credits for by-products, but each case must be 
governed by physical conditions* Where such by- 
product is, of comparatively small consequence, 
the cost involved dan be based on percentages 
secured by careful tests. On the other hand, 
where the by-product is ari important feature and 
where the raw material involved is subject to 
speculative market conditions', the by-product 
portions thereof v/ill in like manner usually re- 
flect market conditions. In such cases, it is 
customary to use current quotations for the 
scrap, as such, in crediting such scrap or by- 
product material to , the primary raw material ac- 
count. This method is fair both to the primary 
and secondary product departments, where each 
has its own problems to contend with and its own 
profits to earn. 

The cost of direct labor, materials, and man- 
ufacturing overhead used in producing by-products, 
is debited to the by-products account, and the 
cost of the by-products sold is credited to the 
by-products account and debited to the sales of 
by-products account. TRe income from the sales 
of by-products is oredited to the sales of by- 
prodjLcts account and the balance of this account 
is shown in the profit and loss statement either 
as nan- op era ting income or as an item to be shown 
separately and then added to the ordinary sales* 
The- latter method seems preferable^, as the sales 
of by-praduots appear to be operating item.s." 



81" 



CHAPTER XIT 

PINiailSD GOODS 

Diviaion of Fimotiona 

The duties in regard to fini^ed ^oodd are 
not segregated but are diatribiited to the vari- 
ous departments. 2?he sales department seouree 
the sale, the credit depaxtment passes on the 
credit of the .vendee, the sales department is- 
sues liie shipping order, the stooic department 
pacics the goods, the shipping department ahipg 
the products, and the accounting department 
bills the customer and records iiie Bale in the 
financial books and in tiie finished goods ledger. 

Sales Ord,er 

The sales order form is either the original 
purchase order made out by the vendee (see illus- 
tration given on page 3E) or a recapitulation 0-f 
the same date made by the salesman on the ven- 
dor's stationery. 

Shipping Order 

After a sale has been approved by the credit 
manager, the sales department fills out a ship- 
ping order form, except for the "units shipped" 
column* A simple illustration of a shipping or- 
der is given on page 83 . The original and two 
copies of the shipping order are sent to 1jie 
stores department, and one copy each to the files 
of the shipping, accounting, and sales departments. 
The storeroom then packs the goods, fills in the 
"units siiipped'' column and "packed by" space on 
the original and the tv/o copies of the shipping 
order i and sends the goods and the original and 
one copy of tiie order to the "shipping department. 
The second copy, after being initialed by the 

88 



No. 73 
SHIPPING ORDER 
Ship to John, J 02193 Date May 8.^1922 

Address Chevy Chase, Md . Their No . 51 
Bill to_ 
Address 



same 



Kow Ship B.O.frt, 
Wheri Ship At once 



UNITS 



1,000 
1,300 
1.500 



UNITS 
SHIPPED 



DESCRIPTION 



1,000 
1.300 
1.600 



Finished Goods ^1 
Finished Goods #2 
Finished Goods #3 



. , 




Approved 


C. D. 


Signed A. B. 


Paciced 1 
Shipped 


'7 ^ 


E. F. 

G. H. 


No. B/L 10^,789 
No. S/I 69 



shipping department, is filed by the stores de- 
partment. The shlppine: department forwards the 
finished goods to the vendee, and, after filling 
ih tte "shipped t^y" and "No. B L" spaces on the 
original and capie-s ( ind udiikg its ownj of the 
shipping order-, sends "ftie original copy, with 
the original hill of lading attached, to the 
accounting department via the sales department 
v\4iich records all untlsual pri oe quotations. 
thereon, and one- copy, witli a copy of the hill 
of lading- attached, tar the ship^^ig department's 
files. 



When the .OPiiginal shipping order, with the 
original bill of lading ettacEed, is received by 
the ao counting department, it issues a,.3ale-s in- 
voice, and two copies thereof^ somevtial -like the 
form given on page 84. The original sales in- 
voice and the original bill of. lading ai-e sent 
to, the vendee » one copy is placed in the acooimt 
83 



"X" MANUFACTUBING COMPANY 
WASHINGTON. D.C. 

Our No. .69 
Sold to John Jones Your No. "UT 
Address Chevy Chase, Md. May 6. I92a 
Terms Net . 




Original 



ing department's files as the substantiating, 
voucher for the entry made in the sales' book, and 
the second copy is used to substantiate the enti>^ 
on the finished goods ledger ( stocic cards). 

Finished Goods ledger 

The same infoiraation is needed in regard to 
the stoG^ of finished goods as is. needed in regard 
to the stoGxC of raw materials and component parts. 
Information of the maxiinum and minimum stoo/cs au- 
thorized, the sources of future- supplies, the num- 
ber of the vouchers substantiating receipts and 
issues, and the balance on hand are needed for 
managerial purposes. The ill'u strati on of a fin- 
ished good^ ledger on page 85 is. therefore, strik: 
ingly similar to the illustration of a raw rrateri- 
als ledger and a component parts ledger given in 
Chapters V ana XI. respectively. 

Inventor! es 

The sum of the balancea on the stook: cards is 
tht ptrTpetual or booK inventory of the finished 

64 




goods on h and valued at 
oost. Like the bool£ in- 
ventories of raw mater i- 

Is, ffoods in process , 
and Gomponent parts, the 
booK inventory of .fini^^ed 
goods must "be verified from 
time to time wi th a physi-. 
cal inventory of the units 
valued at oost. Any excess 
of" the book over the physi- 
cal inventory v«/ould consti;^- 
tute a. general rather tkan 
a manufacturing expense. 
The inventory of fini^. ed 
goods should be shovm on 
the balance sheet, at cost 
or narlcet value, wjhichever 
is the lower. Any excess 
of 1iie cost value over the 
market value should be deb- 
ited to the ''loss on inven- 
tory" account (a financial 
item) and credited to the' 
"reserve for inventory fluc- 
tuations" account (a valua- 
tion reserve). The account- 
ing for the "reserve for in- 
ventjory fluctuations" ac- 
count is shown on page4-4-;e 
Frequently space is provided 
on the stock cards for the 
dates of the phy si cal i n^ en - 
tories and the initials of 
th e re sp on s i bl e off i cia la * 

Controlling Account ' 



The stoeic cards are o on- 
trolled by the general ledg- 
er account entirled "fin- 



ished goods". 
85 



V/hen finished ■ 



goods are transferred from Ihe factory to the 
stcx^lfcroom, the entry, 

Finished Goods $1,200 

Goods in FroGeas-Prime Cost |l,050 

Maiiufaoturing Expense 160 

'is made in the finished goods journal, if tiiat 
booii: is kept (see illustration given on page 10 )^ 
or in the general journal. When tbe finish^ 
goods ere sold, the entry. 

Accounts Receivable! Johri Jones) $9,750 
4;o:3t'of Sales 7,600 

Sales $9,750 

Finished Goods 7,500 

is made in the sales book (see illustration given 
on page 10 j . 

Inspection Department 

The duties of the inspection departm.ent are 
three-fold: (a) Examinati on of incoming raw mater- 
ials (see caption "inspection department" in Chap- 
ter V), (b) detection of defects in product, and 
(c) prevention, as far as possible, of future de- 
fective work . 

In detecting the defective work, it is vitally 
important that the product be inspected at its dif- 
ferent stages of manufacture so that no additional 
expense will be incurred on goods v^Siich must be 
scrapped. 

All scrapped work is studied with a view of as- 
certaining the causes of the defects. This study 
enables the inspection department to reduoe the 
future number of defective units by reconimendations 
as to imp.rovements in blue prints, tools, produc- 
tion methods, etc. 



86 



Defective. WorK: 

Defective work: niay be classified as to th.e rea- 
sons for the defects, viz., faulty material and 
faulty worfcmanship. This classification serves as 
fL basis for the improvements suggested by the in- 
spection department and for the system of account* 
ing for the loss due to the defective work. Both 
ijie material acid labor cost of defective wor)c 
caused clearly by tke carelassness of the work- 
men is sometimes charged to the re.sponsible. work:- 
men. The cost of the defective wofk caused by 
faulty material is not chargeable to the workmen. 
The labor cost of defective work, the cause of 
which can not be clearly determi|ied, is frequent- 
ly charged back to tlrie workmen. 

All losses on defective work, Miich can not be 
recovered from the workmen, are chargeable "to the 
production order on which, the defective units 
were made, if the v/o-rk is special and will not 
li'^ely occur again, or to the overhead of the de- 
partment in v^i ich the defective work occurred, if 
the goods manufactured are the usual product. The 
practice of charging unrecovera'ble losses on de- 
fective units of unusual products to the produc- 
tion order on v^. ich they were made increases the 
accuracy of the cost figures, and the charging of 
the losses on defective units of usual products 
to the overhead of the responsible department axsts 
as a deterrent on future defective work, as the 
departir.ental officials are thereby made fceenly in- 
terested in this source of expense. 

Defective worK calls for the use of goo"^ judg- 
ment in salvaging the ns-terials, as ns-ny of the 
methods used in repairing are so expensive that, 
unless care is used, the cost of the repairs v/i 11 
exceed the original cost'of the unit. 

Pormal reports of defective work: are frequent- 
ly used so that this'souroe of expense will be 
given adequate attention by the factory officials* 
Instead of having- special reports for defecti.ve 
work, space is sometimes provided on the cost 

87 



sheets for the' duta as to the defective wor'k: and 
the causes thereof. 

Cost Stati sties 

Statistical tables contraatj ng by months the 
available supply of tSr i e various kinds of prod- 
uct, the unfilled sales orders, and the unfilled 
production orders are frequently very us-eful in 
showing the sales department v^i at lines ar^ over- 
stocked and the factory n^anager ^-tiat lines are 
understocked. 

A sales nmnager can get a good idea of the 
profitableness of -aie different salesmen by 
classifying their sales by the various kinds of 
product and 1he-n calculating the profit made on 
their sales. He can also keep accurate infoima- 
tion as to v\hich of the lines of product is the 
best to promote by periodically co^mpiling tables 
which shov/ the costs and selling prices of the 
different kinds of product. 

A cost accountant can secure helpful inform- 
ation by comparing for each line of product the 
unit materia], direct labor, and overhead costs 
under each production order completed. He fre- 
quently finds it advisable to set up a table 
shov;ing.by months the itemized budget allowances 
and tti e itemized actual expenditures. If de- 
sired, the table can also show the accrued budg- 
et allowances and accrued actual expenditures 
up to date. 



88 



CHAPTER XIII 
PRODUCT COST SYSTEMS 
Departmental Accounts 

As was seen in Chapter lY under the caption 
'^accounting use of orders", unit costs are not 
calculated on production orders in continuous 
product industries, but are computed "by dividing 
the excess of the sum of the initial inventory 
of uncompleted products and the manufacturing 
outlays over the final inventory of uncompleted 
products by the number of units of product com- 
pleted. However, the variable conditions in a 
factory usually cause unit costs to be ascer- 
tained by departments rather than by the factory 
as a whole. The factory unit costs then are the 
sum of the dej)artmental unit costs, if the gener- 
al factory overhead has been diffused to .the de- 
partments. 

The calculation of departmental unit costs 
forces the use of controlling accounts for the 
departments, the balances of v;hioh equal the 
cost of the uncompleted products in the depart- 
uie. nt s . 



DEPARTMEKTAX ACCOUNT 



Debits: 

For initial inventory 

of goods in process 
For receipts-" of : 

( a) Raw Materials 

(b) Component Parts 

(c) Productive labor 

(d) Manufacturing Pix- 

pense. 



Credits: 
For cost of shipments of: 

(a) Component Parts 

(b) Finished Goods 
For final inventory of 

goods in process 



When more than one kind of product is simul- 
taneously manufactured in a departm.ent, there tkiQ" 
oretically should be a subsidiary ledger account 

89 



for each productioi^ order. Howerer, continuous 
product industries, liice textile mills , asnially 
use statistical tables rather than aubsid^-ary ledg- 
er accounts in the proration of depai^tmental costs 
)?8tween kinds of products. These statistical tab- 
les have the same effect as ledger accounts, and 
in Problems i;5-A and i4-A simple "T" ledger ac- 
counts are used to prorate the departmental costs 
as til ey emphasize the fact that the costs are both 
controlled and prorated and yet da not convey the 
impression that there is a normal form of a subsid- 
iary departmental ledger. 

The final goods in process inventory may be as- 
certained either (a) by a physical inventory or 
fb) by ratios which assume that the various units 
of goods in process have all reached a certain 
stage of completion. For an illustration of the 
latter method, calculate the. value of the final in- 
ventory of the goods in process from the following 
data pertaining to a cotton mill, which assumes 
that each partially completed unit of goods in proc- 
ess costs 100 per cent of the cotton cost, and 50 
per cent of the direct labor cost, and 60 per c^t 
of the burden cost of each unit of completed product. 





Number 




Direct 






of 


Cotton 


Labor 


Burden 




Units 


Cost 


Cost 


Cost 


Initial goods in 










process inventory 


1,000 


|6 ,000 


$4,000. 


$5,000 


New units put in 










process 


102,000 


609,000 


300,500 


200,600 


Finished goods com- 










pleted 


100,000 








Pinal, goods in proc- 










ess inventory 


3,000 









Th« cost ^^ each unit of finished goods would ^e: 
Cotton 00 St - ($609,000 f $6,000) -r (100,000 f 

3,000) or $5. 

J)ireot labor oost - (|300. 500 ^ $4,000) -f- (100,0004 

(.50 X 3.000)) or Js. 

90 



Burden oost - ($200,600 -^ $3,000) -f (100.000 -f- 
( ,60 X 3.000) ) or |8. 

The aost of the final ^oods in process' inventory, 
therefore, would he: 

Cotton cost - (3,000 X $5) or' f 15. 000. 

Direct laho? oost - (3,000 X l-^O 2 $3)) or 
$4,500. 

Burden coat - (3.000 X (.60 X|2)) or $3,600. 

Total cost - ($15,000 t $4,500 -h $3,600) o^ 
$23 ,100 . 

Raw Material Co3t5 

Raw Material is issued under a product cost 
system upon raw. material reqiiisiti ons. which, in 
addition to showing the production order ohsrge- 
ahle, show the department chargeable. Raw mater- 
ial requisitions may record either quantity only 
or hoth quantity and price. In the former case 
the requisitions would not be recorded at the. 
date of issue but would be merely filed by de- 
partments ^ ajid then at the end of the accounting 
period the requisitions for each departrnent would 
be totaled as to quantities and the resulting sum 
priced at the average cost fo3P the period. The 
cost of the material issued t.6 each department is 
debited to the respective departmental accounts 
and credited to th9 raw material controlling" ac- 
count, 

I^ ^ v ^sible Wa ste 

The invisible v/aste of raw TR^terials is an im- 
portant item of expense in mg^y continuous prod- 
uct industries. Invisible waste is especially 
important in textile mills-. In which the^ ^rink- 
age in the weight' of 't^e cotton in the cleaning, 
carding, and spinning 'processes and the shrink:^ 
age in the length of the threads in the weaving 
process are very important. 

In oalcu3-ating the cost of the units, of fin- 
ished goods, the- invisible vmste is taken care of 

91 



by dividing the total outlays by the number of 
units completed instead of trie number of units 
placed in process. The inventory of goods in 
process is usually valued on the assumption 'that 
the units of poods in process cost a given per- 
centage of the cost of the completed unit. If 
they are, however, valued on the basis of the 
actual material, labor,, and overhead costs, the 
material costs must be adjusted to cover the in- 
visible waste. 

Productive Labor" Costs 

As unit oo3ts are calculated under a product 
cost system only periodically, the time ticKets 
need not be posted to the departmental accounts 
daily. Instead, the time ticiiets ^re cl&ssifie.d 
by departments periodically (usually when the 
payroll is paid), and then the total payroll ap- 
plicable to each department is charged to the 
proper departmental account. 

Overhead Cost-s 

The various elements in factory overhead. are 
prorated between the departments as equitably as 
possible, all charges caused da rectly by the var- 
ious departments, being posted directly to their 
departmental accounts in order to reduce the gen 
eral overhead that must be prorated arbitrarily. 
The departmental overhead can be prorated to the 
various Icinds of product on .any of the standard 
methods of distributing overhead discussed in 
Chapter IX, the most appropriate being chosen in 
each case. 

T ypical Journal Entries 

In. order to demonstrate the method of account- 
ing control used in product cost systems, a fin^l 
post- closing trial balance, which is the result 
of posting the interim journal entries to an ini- 

92 



tial pc^3-t-o losing trial "balance, is shown "below. 
"A^ MANUFACTURING COMPAlOr 
INITIAL POST-CLOSING TRIAL BALANCE 
Gash $10;OQO 



AcGounts Reoeivable 


6,000 






Raw Materials . 


3,000 






Goods in Process 


1,000 






Component Parts 


1.000 






Finished Goods 


2.000 






Plant and Equipment 


50,000 






Vouchers Payable 




*2 


,000 


Reserve f"or Depreciation 




5 


,000 


Reserve for Bad Debts 






500 


Capital Stock 




60 


,000 


Surplus 




4 

p2 


,500 




$72,000 


000 



INTERIM JOURNAL ENTRIES 

For Initial Goods in Proce-ss inventory 

Department #1 \ ' ' ~ $500 
Department #2 300 

Department #3 200 

Goods in Process '!|l,000 

For Outlays 

Raw Materials 120,000 

Productive Labor 15,000 

Manufacturing Expense £),000 

Selling Expense 700 

Administrative Expense ^00 

Vouchers Payable |41,200. 

For Additions to Reserves 
Manuf ac turing Expense $500 
Bad Debts 100 

Reserve for Depreciation |500 

Reserve for Bad Debts 100 

93 



For T39U8 0f Bw ¥at#rial». and Component Parts 
Department #1 $9,000 ~ 

Dapaxtfttent #t 8,000 

Dejjartaaent #3 6,000 

Baw Mat&tials $18,000 

©omponen't Pax'ifs 5,000 

l^or Prom1^Io!l of Direct Labor and Qyerhaad 
Department #1 'f7,500 

Department #2 7,000 

Department #3 6,000 

Produotive Labor $16,000 

Manufacturing Expense 6,500 

Tot Interdepartmental Tranaferg^ of Uncompleted 

Department #1 $10,000 

Department #3 9,000 

Department #3 8,000 

Department #1 |9,000 

Department #2 8,500 

Department #3 9,600 

For Completion of Finished Oooda and Component 
?&rt3. 
Finished Goodg |36,500 

Component Parts 5^000 

Department #1 $16^500 

Department #2 14,900 

Department #3 10^100 

For Final, GabAg in l^rdoeaia Inventory 
Goods in Pro.oas* $3,000 

Department #1 f 1,600 

Department #2 900 

Department #3 600 

For Sale s 
Aooounts Reoeivable 135,00©' 

Cost of Sales 24v600 

Sales 1136,000 

IlnisHed Goods ^4,600 

M 



^or Cash Reoeipta 
Cash ' ' ^33,600 

Sales Disoount 500 

Aocounta Reoeivahle |34.^000 

^or Gash Paymmit's 
Vouohere Payable fig^OOO 

Cash $40,000 

Jurehaa^ l^;lsoovuat 2,000 

Sales- "*■'"■■; ~^6,000 

Purchase DiBoount g»000 

Sales Diso6unt |500 

Cost ot Sales 24,500 

Selling Expense 700 

Administrative ExpenQjB . . 500 

Bfia. Debts' 100' 

g^rplua 10,700 

'^A'' MAKUi^ACTURING COMPAlTY 

FIKAL POST-GLOSHfG TRIAL BALANCE 

Ca^h . $3,500 

AcGQunts Receivable 6,000 

Raw' Materials 6 ,000 

Goods in Prooeas 3,000 

Component Parts 1,000. 

Finished Goods 14.000 

Plant and Equipment 50,000 

Vouchers Payable $1,200 

Reserve for Depreoiaticrn 5,500 

Reserve for Bad Debts^ 600 

Capital. Stock 60,000 

Surplus . .15,200 



'$88.500 lei! 500 



It is evident xhat the two entries affecting, 
the "goods in prcrcess" account can be eiiminate'd 
by leaving the incompleted products in the de- 
partmental accounts and then combining the bal - 
95 



anoe of the departmental aoGounts under the cap- 
tion "goods in process" in the balance sheet. 
A3 this procedure inakes the entries mentally, the 
two entries have been included for simplicity. 

Accounting Books 

Books Same as in Special Order Systems. As 
changing the cost basis from the special factory 
order to the product does not affect the trans - 
a"Stions with outside concerns or the data needed 
as to the available supplies of raw materials, 
finished goods, and component parts, the forms 
of the following books can be the same- in both 
the speoial order &nd product cost systems*, (a) 
Cash receipts book, (b) cash disbursements book, 
(o) vouchers payable register, (d) general ledg- 
er, le) sales ledger, ( f ) raw materials ledger, 
(g) finished goods ledger, and (h) component parts 
ledger. 

Books Changed or Discarded. The departmentali- 
zation of factories under product cost systems 
forces the form of the following books used in 
speoial order cost systems. to be either Qhanged 
or discarded in product cost systems: (1) Requisi- 
tion Journal, (2) finished goods journal, (3) 
goods In process ledger (cost sheets), aad (4) 
general j oumal . 

1. As the requisitions of raw materials and 
component parts must be classified by departments 
in product cost systems, the requisition journal 
must be changed so it v;ill have a money column 
for each department, or it must be discarded and 
the classification recorded in the general jour- 
nal. As issues of raw materials are frequently 
entered on requisitions as to quantities only, it 
is usually preferable to record the summaries of 
the requisitions, when priced in the general 
journal. 

2. The transfe-^al of partially complated prod- 
ucts from one department to an6ther in continuous 
product industries rondere thi e form of fini^^ed 

96 



goods journal iised in special order oost systems 
inadequate fo-T produot^oost-sysxems. All of the 
int-erdepar-tisentis.1 transfers and the final trans-- 
fer to xhe etoclcroom can he 'recorded in sl simple 
form of general . journal , as was' done in Proh- 
iem 13-A and 14-A. ^ As these transfers are- fre- 
quently nraUe In quantities.. only, suhjeot to val- 
-uation at end of aeaounxing period; sej^ rate 
sheets are- sometimes assigned for eaoh class of 
transfer. These siieets, whioh oonstitute' a part 
of the general journal, fulfill the functions of 
the finished good-s Journal in the special order 
cost system, 

3, As mentioned above under the caption "de- 
partmental accounts", continuous product indus-- 
tri es do not usually maintain -departmen.tal goods, 
in process ledgers to determine the departmental: 
unit costs of the various kinds of praducts, The 
statistical tables used in lieu thereof have prac- 
tically the same effect as- the -supplanted ledgers . 

• 4. While the sco.pe of the entri es recorded in 
.the general journal is greater In a product, cost 
.system than in a special orerer cost system, the 
simple journal form may he maintained. As men- 
tioned above, however, special sheets are some- 
times assigned to each type of transaction. 

Chart - 

The oha.rx- below, whi'ch is -subject to the a!bove- 
oomments on departmental (goods in process) led-g- 
er-s,. presents in diagrammatic form the accounting 
booics and records used in continuous product in- 
dustries. The booKs and records are arranged and 
aonneo^ed so as to atiow the functions of each,, the- 
ours a. of entries from one to another, and the gen- 
-6 ral relation eaoh bears to the others a^id to the 
system as a whole. 



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CHAPTER XIV 
DISPUTED COST ELEIvENTS 
Insursuioe 

Of- the four kinds of insur.ance, property, em- 
ployers' - liabilj ty , ourglary and life, only the 
last is clearly outside of the realm of cos't ao- 
Gounting. The excess of the insurance prernJuns 
on policies insuring the lives of oifjcers for 
the benefit of the corporation over the increase 
in the" cash sur r en 'd^r. value of the poliei es is 
universally charged to administrative expense. 

As to the other three l<:inds of insurance one 
school of accountants believes that the premiums 
should be prorated over the departments of the 
business in proportion, to the expense that is 
caused oy the' necessity of protecting the_ capi- 
tal Invested in them, i. e,, the insurance prem- 
iuLis should be prorated between the factory, the 
office, and the sales department and only the' 
premiums applicable to;, the factory should be in- 
cluded in factory overhead. The other school of 
accountants " views insurance premiums as' payments 
made for the protection of capital and therefore 
classify them. as financial or non-operating ex- 
pense. 

While the reason for insurance is undoubtedly 
the protectio-n of capital, this argument is not 
a conclusive reason for eliminating -insurance 
from factory overhead, While, a manufacturer., who 
buys a season's supply of; long staple cotton In 
advance of his supply .of -prdinary cotton as he 
needs it,; can correctly ascertain his gain for 
the season if he classifies ' the heavy insurance 
charges on the former to financial expense (pro- 
viding there are so final inventories), he oan 
not tell which of his lines of product is pro.f-. 
i table without allocating the insurance- pr^niums 
to the produot on the basis, of the poundage of 
long staple cotton used. This allocation am-ounts 

^9 



to including the insurance premiums among the 
cost elements. 

The dispute as to whetJaer or not insurance 
premiums are a cost element does not affect the 
accounting for unexpired insurance « The premiums 
are paid in advance and therefore constitute de- 
ferred charges to income, which can best be pro* 
rated from a separate as-set account entitled "un- 
expired insurance" 



Tne discussion of rent as a cost eXement must 
be divided into two divisions, one for rent on 
owned property and the other for rent on unowned 
property. As rent on owned property is practi- 
cally interest on : investment . its discussion is' 
included below under the caption "interest". 

Most accountants prorate rent on unowned prop- 
erty to, the various departments of the business 
in proportion to the expense that is caused by 
them, the. rent of the sales department being con- 
sidered selling expense and the rent of the fac- 
tcJry being included in factory overhead. A 
few accountants, hovi^ever, hold rent to be an 
expense due to lacic of capital and therefore 
treat it as a financial or no n- ope rating, ex- 
pense. It seems preferable to include facto- 
ry - r e nt among th e manuf a.c turi ng expe ns e s f or 
the same reasons that ins.urance premiums should 
be included. The manufacturer, mentioned above 
could not tell wnether he was making or .losing 
on his long staple cotton goods unless he pro^ 
rated the rent he paid for- the ware^jouse in. 
which -the long staple cotton was stored over 
the product on tiae basis of the long staple cot- 
ton used. 

If a part of a rented property Is subleased, 
.^he rent paid should be allocated between opar- 
attng" and ..ucm operating, expense and. all the 
-rent received treated as non-operatihg income 
as this praatio© gives truer costs than to de .- 

100 



auGt the rent received from the rent paid before 
allocating the latter to the different depart''. 
mentg. 

Taxes 

Assessment sfcd income taxes are .clearly out- ■ 
si-de the realto of cost accountinfr, as the form-. 
er.iiKould^e capitalized because they increase x 
the value of the property taxed, and .the latter 
should be charged direj3tly to surplus as they 
are levied on the assumption t3:..at the government 
is a partner in the business. 

Most accountants prorate general property 
taxes to the various departments of the business 
on the basis of the value of the taxable proper- 
ty i;n them, the taxes on the sales eouipment be- 
ing considered a selling expense and the taxes 
on the factory equipment being, included in fac- 
tory overhead A few accountants , however, view 
■taxes as payments made for the protection of cap- 
ital, and therefore treat the payments as finan- 
cial or non- operating expense. It seems prefer- 
able .to include taxes paid on th*e factory among 
the manufacturing expenses for the same reasons 
that insurance and rent on the factory should be 
included. The manufacturer, m^entioned above, can 
not tell whether or not he is making a profit on 
his long staple, cotton goods without charging the 
taxes resulting from the fact that the rav/ materi- 
al was stored to liiat particular product . 



"The controversy as. to whether or 2iot interest 
on investment should be included in costs must be 
studied from two viewpoints, (a) correctness of 
its inclusion and (b) advisability of its inclu^ 
sion. 

The dispute .as to the correctness of the in- 
oiusion of interest on investment as a cost ele- 
ment is due to a mi stale em definition of the term 

101 



''profits". The bus mess man defir;es ''profits''- - 
a.s irtcrease in net warth, whe-reas "pre fits" oon- 
stTtute the remainder of the net inccme after de- 
duct ii\ff the Slim of wages, rsnt , and interest pay- 
able to the proprietor. This, misunderstanding as- 
to the definition of "profits" has oaused many ac- 
countants to exclude wages, rent, and interest 
^rom the expenses unless tb ey are paid or pay- 
able to parties other tnan. the proprietor. 
Let: ^ . . 

3 = Sale 3 HP =Rent to Propm etor 

UGE=:Undisputed Cost RO =^Rent to Others 

Elements except IP ^Interest to Propri- 
Wages etor 

OE =Other Expenses 10 =:Inter9St to Others 
WP =Wases to -Propri- TP =True Profit 

etor TFY/=£Lncrease in 1| » c 

WO ^Wages to Others Worth 

T h en th e bu s: n e s s d^. an ' "s e q ua ti on is: 

S-UCE-WO-RO-IO-0£=INW, but 
INW=TP''F^P+KP"i-IP, so 
S-UCE-W0-R0-I0-0E==TP+WP+BP+IP, or 
S--JGE-WO-P.O-JO-OE-V^p-HP-IP=TP. 

From the last equation it may toe seen xnat the 
nature- of the recipient makes no difference on 
the status of wages, rent, and interest as expens- 
es. The en ti re' amount of these items, regardless 
of the reel pients. thereof , can therefore be pro- 
rated equitably over the departments of the busi- 
ness, the proportion chargeable to ti;e factory be- 
ing included in factory -overhead . The accuracy of 
this proration can be seen in the case of the man- 
ufacturer, mentioned above, who can not tell the 
profitableness of his long staple cotton goods un- 
til he chjarges them for- the inte-^'est involved in 
storing the raw material. 

The evident accuracy of tne inclusion of inter- 
est on investment among the manufacturing expenses 
does not, however, prov-e that it is advisable to 
include it, for the cost figures may b'e more ser- 

102 



vi ceaole without tha interest charge than with 
it-. The most important ob.iecti nns to iiiolua- 
ing interest as an elem^it of cost of ruanufao- 
ture, together with the autrro-r'? own opinion 
as to the ad-vl saoili ty of the inclusion, are 
given .in the following quo tati on from his h,ooic, 
"C. P. A. Accounting", Volume I. 

"The oh sections frequently raised to inoliii- 
ing interest as a cost of manufacture are: first, 
the difficulty of determining the rate to he 
charged; second, that interest is usually charged 
only on fixed insrestipents ; tfeird, the difficulty 
of handling the credit offsetting the interest; 
fourth, that a more or less constant element rf=ip~ 
resenting interest tends to ohscure fluctuati ons 
in tFie other assets; and fifth, that the inclu- 
sion of interest as a cost in financial state- 
ments confuses the husi ness world • 

The first of these ohjecti ons is not unsur- 
mountable, for the interest rate to be charged 
does not represent the actual cost of 1iie capi- 
tal invested but only the mark:et rate of inter- 
est. The second objection is faulty, as inter- 
est, is unimportant except v4i ere the element of 
time is vital. Thus, the interest .need not be 
charged on inventories vhose turnover is rapid, 
to justify 'ftie inclusion of interest as a cost 
in the case of seasoned lumber, etc. The fourth 
objection may be answered by stating that cor- 
rect cost figures may be preferable to incor- 
rect cost figures even though the correct fig- 
ures may be harder to. analyze; 

The third and fifth objections to the inclu- 
sion of interest as a cost of manufacture are 
very real and vital. The credit offsetting the 
interest charge is usually made to. profit and 
loss, Vw-hich- is absolutely incorrect, as it an- 
ticipates a profit. The charge to manufactur- 
ing burden is transferred to finished -500 ds 
where it may enhance the inventory - another 
illustration of the anticipated profit. Some 
cost accountants are meeting these objections 

103 



by crediting a re se.rve account when interest 
is xsharged to manufacturing "burden., eaid then 
writing off to profit and loss all of the re- 
serve except an amount equal to the interest 
included in the inventories at the end of" the 
period. This reserve account is then deducted 
_from the invsnt cries on the m lance sheet. 

As the calculation of the interest in the 
final inventories is very complicated, and as 
most of tii e advantages of including interest 
as a coat of manufacture, can be obtained by in- 
cluding it in statistical studies and excluding 
it on the booisis, it would seem expedient to re- 
frain from including interest in .burden, except 
in cases where the time element is unusually im- 
portant and v;here the accounting departments of 
the firms- are competent to clear the interest 
charge thinugh the boocis in such, a way that it 
wil] not cause an anticipated pro .fit.'* 

The accounting for the "reserve for interest 
on investment'' account is shown on pa-ge 59. 



104 



CHAPTER. XV 



ESTIMATING COST SYSTEMS - SIMPLE TYP£ 

- Baal c idea 

The simple type of- estimating- co st systems 
is founded on 1i) e idea of eliminating all sub- 
sidiary oost reooTds,, viz. , rav; materials -ledg- 
er, goods in process ledger (cost sheets), and 
finished goods ledger, and yet. of maintaining a 
partial- control over costs by booking schedules 
of estimated costs and -ftien verii^ing the re- 
sults by physical inventories. This kind of a 
cost system is applicable-in simple industries, 
like hat manufacturing cohcerns, where the in- 
fo nnati on collected, by csmplet^ cost systems . 
costs-more than it is worth. 

^chedul-e of Estimated Costg 

As the schedule of estimated costs is the ba- 
sis' of tJie co3t system, it is important that t^e 
schedules be loade in a uniform manner and" perma- 
nently filed. The form below is typical of those 
used in actual accounting ^stens. 



-SCHEDULE OF ESTIMA.TED COSTS 
^'or Month of -IT ov ember ,1921 



AHTIGLES 



MATE- 
RIAL 



ESTI MATED UNIT COSTS - 



DIRECT 
LABOR 



OVER- 
HEAD 



COST 



Finished Goods #1 
Finished Goods #2 
Finished Goods #3 



|2.5a 
5.00 
5.00 



|r.5o 

3.00 
4.00 



^1.00 
2.00 
3,50 



|6.00 
10.00 

12.50 



r 



Appro ved_ 



X. Y. 



Siened 



A..,B. 



1Q& 



Analysis of Inventory 

As the Gorrectness of the operation of esfl- 
rnating cost systems is check: ed "by means of phys- 
ical inventories, it is important to standardize 
the inventoiy sheets along the aame form as the 
schedule of estimated' costs. Separate inventory 
sheets may be used 'for the finished goods and the 
goods in process, hut this is unnecessary* The 
form "below- is fairly typical of those used in 
actual accounting systems. 



ANALYSIS OP INVENTORY 
Date December 31. 1920 


ARTICLES 


ESTIMATED UNIT C( 


pSTS 


UNITS 


VALUE 


MATE- 
RIAL 


DIRECT 
LABOR 


OVER- 
HEAD 


TOTAL 
COST 


Finished Goods 

#1 

#2 
#3 

Goods in Process 

#1 
#2 
#3 


$2.50 
5.00 
5.00 

§2,00 
4.50 
4.00 


$1.50 
3.00 
4.00 

|.75 
1.75 
3.00 


ll.OO 
2.00 
3.50 

1.25 

.75 

3.00 


j^5.00 

10.00 
12.50 

|3.00 

7.00 

10.00 


100 
75 

60 

50 
50 
50 


^500 
750 
750 


^2,000 


$150 
350 
.500 


^i.OOO 


Approved ^r J" 


Siraied A. B. 



Raw' Material Costs 

The simple type of estimating cost systems 
does not maintain subsidiary records or a con- 
trolling account for raw m-ateri-als , hut keeps 
the simple general ledger account shown on page 
IQV in lieu thereof. Account-ing purposes , do not 
require the use of material Teqjiisiti ons as no 
entry is made for issues of isaw material, hut 
ordinaxy caution usually com^pels .th.eir use as 
106 



issue'? can hardly "be made without written auth- 
orization. 

RAW MATERIALS ACCOUNT 

Debits 



Initial Raw Material Inventory 
Raw Material in Initial Inven- 
tory of Goods in Process ( e") 
Furohases of Raw Material 

Raw Material Inventory (f) 

Credits 

Raw Material in.: 

Finished Goods Completed (a) 
Final Inventory of Goods in 
Process (b) 
Final Raw Material Inventory (c) 
Balance to Profit and Loss (d) 



Notes: 

(a) IN^umher of units of finished goods 

completed times raw material cost 

as per "schedule of estimated costs'', 
(h) Data, from' "analysis of inventory" for 

closing dat.e ; raw material cost times 

number of units, 
(c; Ascertained by physical inventory, 
(d) The halance, vii ether debit or credit, 

is closed' to. profit and loss. 
I e) Same figure as (b) for the previous 

period . 
(f) Same figure as (c); amount of asset 

to be shown in balance sheet. 

Productive Labor Costs 

As .productive labor is not classified either 
107 



by producstion orders or operating departments, 
any kind of time tioket that will show the a^ 
cpounte, owing to each v/oricman, or the data :from 
whioh these amoants can be ascertained, is sat- 
isfactory. The simple ledger account shown be- 
low is the only account kept for productive la- 
bor, other than the account for the accraed pay- 
roll at U e end of an «ao counting period. 

PRODUCTIVE LABOR AC-CO UMT 

Debits 

Productive labor in Initial Inven- 
tory of Goods in Process (d) | 

Amount Paid during Period |....... 

Amount Accrued at* £hd of Period i.... ., 



Qxfiuaits 

Amount Accrued at Start of 

Period *$....... 

Productive Labor in: 

Finished Goods Completed [a; $ ., 

Final Inventory of Goods in 

Process ( b) |, . . , , , 

Balance to Profit and Loss (c) $....>, 

Notes: ' 

(a) ITumber of units of finished goods comv 

pleted times prod u3-tiv.e labor cost as 
per "schedule of estimated costs". 

(b) Data from "analysis of inventory" for 

closing date; direct labor costs 
timas number of units. 

(c) The balance, whether debit or credit 

IS closed to profit and loss. 

(d) Same figure as (b) for the previous 

period. 



108 



Overhead Costa 

^Ite manufaoturing expense aoqount und^r tii8: 
Bimpla type of estimating, cost gy stems is exen 
simpler than under liie speoial order and prod- 
uat oost systems', in that no attempt is made to 
prorate the oo st ov^r produption -orders or oper- 
ating depa3:'tci©.iit3 4 Th6. simpie ladger acoornt 
shown below is the only aoooUnt ^ept for manu- 
faoturing expense ♦ 

MAmJPAO!rUilI¥G EXPMSB ACGOUNl' 

Milts 

Overhead in Initial Inventory of 

Goods in Pro ee 38 <d) ft...... 

Amount Paid, during Period . $. 

Amount A<jp rued at ji^xii of Period j ...... . 



Credits 

Amx5unt AooruQ4 at Start 'of Period 

Overhead in: 

Finished Goods Completed (s) 
Pinal Inventoiy of Goods in 
Process (h) 

Balanoe.to Profit and loss (o) 



ITotes,: 

(.a) lumber of units of finished goods com- 
pleted times overhead cost as per 
"schedule of estimated oosts", 

(h) Data from '*ana lysis of inventory" fbr 
loosing da'te; overhead costs Mme's 
number of unilbs, 

(o) The balanoeg wh-ether debit or oTedit,, 
is closed to profit and loss, 

(d) Same figure as (b) for ■Qie previ ous 
period. 

109 



Goods In Prooess 

The goods in process account is nothing "but 
an inventory account set up at the end of a fis- 
cal period as an offset to the credits to the ac- 
counts for the cost elements for the partially 
completed goods on hand, and closed at the start 
of the next period when the costs are again placed 
in the accounts for the cost elements. No cost 
sheets are used in the simple type of estimating 
cost systems. The value of partially completed 
goods on hand is ascertained by a physical inven- 
tory- 

Finished Goods 

The finisned goods account is the same under 
■bhe simple type of estimating cost systems as un- 
der a special order or a product cost system, in 
that it is debited for the cost of finished goods 
produced and credited wi th_ th e cost of fini she'd 
goods sold. However, as stoc]c cards are not usu- 
ally maintained under the simple type of estimat- 
ing cost systems the cost, of sales muF't he ascer- 
tained either (a) by taicing a physi cal inventoiy . 
or (b) by multiplying the number of units sold by 
the estimated cost of each unit. The latter meth- 
od, \'^. ich is used in Problem 16-A, is preferable' 
as it gives a booK inventory, v\fcen the cost of 
sales is recorded concurrently with sales, vA: ich 
may be periodically checked by a physical invent- 
ory.- 

O.orrection Ad.ju stments 

The size oi the balances which must be trans- 
ferred from the raw materials-, productive labor, 
and manufacturing expense accounts into th.e prof- 
it and loss accou.nt is the index of the accuracy 
of tne schedule of estimted costs. Of course, 
the schedule of est:: iTiated costs is adjusted from 
%i^e to time for the purpose of iceeping these bal- 

110 



ances down to a minimimi. As these "balanbs^ af- 
fect net operating profit and yet do nut consti- 
tute selling or administrative items, the. adjust- 
ments should \)e inserted in the T^rofit and loss 
statement as shown, "below. 



Sales 

Cost oX Sales 

Adjustments : 

Overestimated Raw Ma- 
teri al Cost ^ 
Overestimated Over- 
head Cost $, 



Underestimated Tireot 
Labor Gost 
>ro3S Profit, on Sales 



w- 



Typical Journal Entries 

In order to demonstrate tn e miethod of account- 
ing cozitrol used in the simple type of estimating 
cost systems, a final post-closing trial balance, 
which is the result of posting the interim jour- 
nal entries to an 'initial post-closing trial bal- 
ance, is shown on page 11^. The interim entries 
a'ss.ume that (a) the ''schedule of estimated costs" 
shown above was used during both. 1920 and 1921, 
(b) the initial inventories were a-s shown in the 
"analysis of inventory" on page 106, (c) 1,000 
units of each fcind of finished goods were produced, 
and (d) the final invento ri es ( saDie unit costs as 
initial inventories) included 100 units of each 
kind of finished goods and 'goods in process. 



Ill 



"A" MANUFACTUR-IHG CGMPAUY 
POST-CLOSING TRIAL BALANCE 
Deoacalbar .31, 1920 



OJSLSh , 


lio.ooo 






Aocounts EeceivaBle,' 


5,000 






Raw Materials 


4.000 






Goods in Pxooess 


1,000 






Finiaiaed Goods 


a, 000 






Plant and Equipment 


60,000 






Vouch era Payable 




$2 


.000 


Reserve for Depreciation 




t> 


,000 


R'aserve for Bad Debts 






600 


Capital Stocic 




60 


,000 


3u^ lus 




4 
$72 


,500 




$78,000 


,000 



INTERIM JOURNAL ENTRIES 

F or Initial Goods in Prooess Inventory 
Raw Materials " ' |525 

Productive Labor 275 

Manufacturing Expense 200 

-Goods in Process $1,000 

For 0utla; ^s 

Raw Materials $14,900- 

Productive Labor - 8.750 

Manufacturing Expense 5,250 

Selling Expense 700 

Administrative Expense 500 

Vouchers Payable .|30,100 

For Additiona to Reserves 
Manufactur^g Expense |l,F00 - 

Bad Debts 100 

Reserve for Depreciati_on $1,500 

Reserve for Bad Debts 100 

P(?r .?3sue of Haw Materials and.,:Proration 
^ of Direct. Labor and Overhead 

(No Entry) 
112 



For Completion of Finished Gocda 
Pini^ed Goods '■ $27,500 

Raw Materials $12,600 

Produetive Labor ; 8,600 

Ma nufa Ota ring Experts d 6,500 

For Final" Goods in I^rooess Inventory 
Goods in Process |2,000 



Raw' Materia Is 




$1, 


,06.0 


rroduotive Labor 






660 


Manufaoturiiig Expense 






400 


For Correction Adjuc 


stments 






Raw^Materj als 


-17 5 




Productive Labor 


25 






Manufacturing Expense 






$60 


Profit and Loss 






50 


For Sales 








Accounts Receivable 


|35,000 






Cost of Bales 


26,750 






Sales 




456 


,000 


Finished Goods 




26 


,760 



For Cash Receipts 
Gash ' f 53, 600 

Sales Discount 500 

Accounts Receivable |34,000 

^ For Gash Fayments 
Vouchers Payable f30,6o0 

Cash $30,600 

Purchase Discount 160 

For Closing Bool-is 
Sales ,. ^35,000 

Purchase Discount 160 

Profit and Loss 60 

Sales Discount $600 

Cost of Sales 26,750 

Selling Expense 700 

Administrative Expense 600 

Bad Debts 100 

Surp3-ua 6,650 

113 



"A" lylMUFAGTURING COMPANY 

POS'T-CLOSING TRIAL BALANCE 

December 31. 1921 

Cash |13,000 

AoGounts Reoeivable 6,000 

Raw Materials 5,950 

Goods in Prooess 2,000 

Finished Goods 2,750 

Plant and Equipment 50,000 

Vouchers Payable $1,450 

Reserve for Lepreoia tion 6,600 

Reserve for Bad Debts 600 

Capital Stook 60,000 

Surplus 11,150 

$79,700 ^79.700 

AoQounting: Books 

Books Same as in Other Systems. -As chang- 
ing the cost basis from either the speoi al pro- 
duction orders or the amounts of product manu- 
factured to schedules of estimated costs does 
not affect the transactions with outside con- 
cerns, the form of the following books can be 
the same in the special order, product, and es- 
timating cost J3y stems: [a) Cash receipts book, 
(b) cash disbursements book, (c) vouchers pay- 
able register, (dj general ledger, and (e) sales 
ledger. 

Books. Changed. The general ;iournal under the 
simple type of estimating cost s^r stems contains 
more entries than under the special order cost 
system, in that entries for the completion of 
finished goods are entered therein, and consi d- 
■erably less entries than under the product cost 
systems, because no entries are made for issues 
of raw material or the proration of productive 
labor and manufacturing expense. Because of the 
simplicity of its entries, the ordinary journal 
form is satisfactory for use in the simple type 
of estimating cost systems. 

114 



































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Books Not Used. Like the pixDduct -oo st system, 
the simple type' oi estimating cost. systems does 
not use (a) the fi nish ed goods journal , (Id) 
requJ-Sition journal, and (o) material returned 
journal. In addition to these books, the simple 
tjrpe of estimating cost systems discards (a) tiie 
raw materials ledger (stores cards) , ("b) goods 
in/process ledger ( coat sheets)., and (c) finished 
good's ledger ( s.toCiC 3ards j . 

Chart 

The chart on page 115 presents in diagrammatic 
form the accounting bdoiis and records used in the 
simple type of estimating cost systems. The books 
and records are arranged and connected so as to 
show^the funct: ons of each, the course of entries 
from one to another, and- the. general relation each 
bears to the others and to the system as a vtiole. 



.116 



CHAPTEBXVI 
■ESTIMATING COST SYSTEMS- COMPLEX TYPE 
DeiDartmentaliza.ti an 



Since the simple type of estimating 5cst sys- 
tems does not verify -the estimated unit costs of 
each class of product, the complex type of esti- 
mating cost systems departmentalizes the factory 
■aooor:iing to the various kinds of finished goods 
produced for the purpos'e' of niaking. thi 6 verifi- 
cation. The fundamental idea is to (a) debit a 
departmental account wi th all costs of' producing 
its respective kind of product,- (o) credit tiie 
account with, the product of the number of units 
produced tir.es the estimated ' unit costs, aiid (c) 
veri:^^ -the results hy inventories. Under this 
plan, a departmental account like the following 
is maintained for each type of finished goods. 

DEPi^RTMEl^TAL ACCQUITT 

Debits 

•Initial Inventory of ^espac'tive 
Kind of Partially. Completed 
Finished Coods (d) $ 

E9.W Mater ialsLfrom summ&ries of 

requ i s i ti ons ) ^ 

Pioduotive Labor (from classi- 
fied pay r 11 ) ■$ 

Manufacturing Expense (from dis- 
tribution of overhead' $ 

Credits ~ 

Estimated Cost of: 

Finished G-oods Completed (a) $ 

Final Inventory of. Respective 
Hind of Partially Completed 

Finished Goods (b) t 

Balance to Profit -and Loss ( c ) |; . . . , . 

I 

X17 



Notes: 

(a) Number of units of respective kind of 

finished goods oompleted times total 
unit cost as' per "schedule of estimat- 
ed costs". 

(b) Data from "analysis of inventory" for 

closing date; total unit cost times 
number of units of respective kind of 
parti ally completed fini shed goods on 
hand, 

(c) The balance, whether dipbit or credit, 

is closed to profit and loss. 

(d) Same figure as (b) for the previous 

pe ri od . 

Schedule of Estimated Costs 

The form of the schedule of estimated costs 
used under a complex type of estimating cost, 
systems is the same as .-the form used under a 
simple type of estimating cost systems ( see 
Chapter XY for illustration) . The details as 
to the costs of each element in the finished 
goods are not recorded on the sic counting books, 
but are used when the estimates are revised 
from time to time. 

Analysis of Inventory 

Both the form and accounting use of the "an^ 
alysis of inventory" are the same in the simple 
and complex types of estimating cost systems 
(see Chapter XV f or illustrati on) . 

Raw Material Costs 

Raw material costs are recorded in the com- 
plex type of estimating cost systems in the' same 
manner as they /are recorded in the product cost 
systems, i. e.', a controlling account and a sub- 
sidiary raw material ledger (store cards)' are 
maintained. As no cost sheets are kept, the raw 
material requisite ons need, not be posted daily 

118 



as credits on the store cards. The raw materi- 
als requisitions are periodically summarized by 
departments and debited to the various depart- 
mental accounts and credited to the raw materi- 
als controlling account . 

ProduQtive Labor Costs 

As in the product cost systems, the time 
tickets do not need to he posted daily to the 
departmental accounts. Instead, they are peri- 
odically classified "by departments (usually when, 
the payroll is paid) , and the amount applicable 
to each department is debited to the proper de- 
partmental account. 

Overhead Costs 

The various elements of manufacturing expense 
are prorated between the departments as equita- 
bly as possible, all charges caused directly by 
the various departments being posted directly to 
their departmental accounts in order to reduce - 
to a minimum the general overhead that must be 
prorated arbitrarily. 

Goods in Process 

The goods in process account is simply an^in- 
ventory account established at the end of each 
fiscal period as an offset to the credits to the 
departmental accounts for the cost (physiaal in- 
ventory) of the partially completed products on 
hand, and closed at the start of the next period 
when the costs are again placed in the respect- 
ive departmental accounts. No cost sheets are 
used in the complex type of estimating cost sys- 
tems. 

Finished Goods 

The finished goods are recorded in the com- 
plex type -of estimating cost systems. in the 

119 



same manner as they are reoord.ed in the special 
order and the product cost systems,. i. e., a 
controlling account and a subsidiary finished 
goods ledger ( stooK cards )are maintained. 

Correction Ad.justmenx 

The size of the ."balances which must be trans- 
ferred from the departmental accounts into the 
profit and loss account is the index of the ac- 
curacy of the Schedule' of estimated costs. The 
schedule is adjusted from time to time to reduce 
these balances to the lowest possible figures. 
The correction items appear as adjustments to 
the cost of sales in the profit and loss state- 
ment. 

Typical Journal Entries 

In order to demonstrate the method of account- 
ing control used in the complex type of estimat- 
ing cost systems, interim entries are given belov; 
for the same transactions as are journalized un- 
der the simple type of estimating cost systems in 
Chapter XV, Posting these interim entries to the 
initial post-closing trial balance given in Chap- 
ter XV gives the final post-closing trial balance 
given in Chapter XV. 

INTERIM JOURNAL ENTRIES 

For Init i al Goods in Process Inventory 
department #1" . " |150 

Department #2 "350 

Department #3 600 

Goods in Process $1,000 

?ar Outlays 

Raw Materials $14,900 

Productive Labor 8,750 

Manufacturing Expense 5,250 

Selling Expense 700 

Administrative Expense 500 

Vouchers Payable . $30,100 

120 



For Additions to Reserves 
Manufaoturi ng Expense ~~ f 1,500 
Bad Debts 100 

Resei*ve for Depreoieiion $1,500 

Reserve for Bad Debts ' 100 

For Issue of Raw Materials and Proration, of 
Direot Labor and Overhead 
Department #1 ' |5^1E6 

Department #2 10,370 

Department #5 -12*965 

Raw Materials , ' $12,950 

Produotive Labor 8 [750 

Manufacturing Expense 6^750 

For Coffiple'tion of B\ini shed Goods 
Finished Goods ' ' $27,500 

Department #1 $5, 000 

Department #2 10,000 

Department #3 12,500 

For Final' Goods in Process Inventory 
G-ooda in Process ' $2,000 

Department #1 $300 

Department #2 700 

Department #3 1,000 

For Correction Adjustments 
Department #1 " |25 

Department #3 45 

Department -#'2- |20 

Profit and Loss 50 

For sales 
Accounts Kecelvabla '$35,000 

Gost. of Sales E6,750 

Sales .$35,0.00 

Finished. Oo.od.s 26,750. 

■Ppr Gash -Reoelp^e 
Cash ^""*^ |33,500 

6ales Discount .500 

Accounts Heoeivabl8 $34: DOO 



For Casli Payments 
Vouohers Payable $30,650 

•Cash $30,500 

Purchase Discount 150 

For Oloaing Booics 
Sales $35,000 

Purchase Discount 150 

Profit and Loss 50 

Sales Discount $500 

Cost of Sales 26 750 

Se-lling Expense 700 

Administrative Expense 500 

Bad Debts 100 

Surplus 6,6t)0 

A comparison, of the above interim journal en- 
tries with those given in Chapter XV for the sim- 
ple type of estioBting cost systems shows that 
six out of the eleven entries are exactly the 
same. 

Accounting Booics 

The accounting books used by the complex type 
of estimating cost ^stems differs from those 
used in the simple type of estimated cost systems 
only in that the foi^mer uses a raw materials ledg- 
er and a finished goods ledger and the latter does 
not. 

Chart 

The chart below presents ill diagrammatic form 
the accounting books and records used in the com- 
plex type of estimating cost sjy stems. The books 
and records are arranged and connected so as to 
show the functions of each, the course of entries 
from one to another, and the general relation each 
bears to the others and to the system as a whole. 



122 





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APPEND IX 



Aooountlnft' Polnta Emphasized in Proljlemg 

1-A Non-Gost system, valuation of inventory. 
1-B Non-00 3t system of tooKs and a-oeo'unts, 
2-A Cost system, controlling acoounts in gen- 
eral ledger. 
2-B Cost system, controlling accounts in gen- 
eral ledger. 
2-C Cost system, proration of burden. 
2-D Cost system, calculation of initial bal- 
ance sheet. 
3-A General and factcry ledger accounts. 
3-B General and factory ledger accounts. 
3-G Controlling accoi!nts in factory ledger, 
3-D Controlling accounts in factory ledger. 
4-A Changing non-cost system to cost. system. 
4-B General and factory ledger accounts. 
5-A Subsidiary accounts, cost-of-material 

method of prorating burden . 
6-A Sub si diary accounts , cos t-of--direct-labor 

method of prorating burden. 
7-A Stores and stooJc cards, prime-cost method 

of prorating burden. 
8^A Payroll, labor-hour method of prorating 

burden . 
9-A Payroll, maohine-hour method of prorating 
burden. 
10-A Budgetary control of expenses, fixed-ma- 
chine-rate method of prorating burden. 
11-A Pixed-machine-rate method of prorating 
burden, supplementary rate for idle 
ti me ♦ 
12-A Fixed-machine- rate method of prorating 
burden, supplementary rate for id'le 
time • 
13-A Product cost system. 
14-A Product cost system. 
15-A Simple- type .estimating cost system. 
16* A Complex- type estimating cost 3;y-stem. 
124 



Prol)lein 1-A 

"A" MANUFACTURIITG COMPAKY 

TKIAl BALANCE 

December." 31, 1920 

Cash |1,000 

Accounts Receivable 11,000 

Macliiner^' and Equipment 150,000 

Office Furniture -and Fixtures 5,000 

Raw Material, l/l/SO 12,000 

Goods in Process, l/l/20 6.000 
PiniBhed Goods, l/l/20 ( 100 

"units) 13,000 

Purchases 51,000 

Pr eight- In. 1,500 

Freight -Out. 2,000 

S t ahl e Exp en s e- A f :to f ac to i^O 3,000 
Rent Paid [ -| to -factorjr, -| to 

office, -^ to sub-lease) 8,000 

Light- (f to" factory) 2,000 

Heat f| to 7?actoiy-) 4.000,^ 

Factory Superintendence 7 ,5Q'Q,' 

Productive Labor 76.,00© 
Unprodiotive labor (7/8 to 

factory) 16,000 

. Salesmen^ s Salari es 4,5*00 

Advertising 10,000 
Rent Received $3,000 
Sales (.2,000 "units) 250.000 

Pis count, on' Sal 63 2,000 
Discciint- on Purchases- 4,000 
Returned Purchases 1,500 

Returned Sal-es (10 units) 1,500 
Allowances on Purchases 500 

Allowajioes on Sal as' 750 

Traveling Expenses 1,350* 

Le-gal Expense 2,500. 

Bad Debts 4,000 

Footings forward 'f 395,500 

Al 



Pootings iDrought forward |395,500 ^259. 000 
Interest. Received 250 
Repairs 1,000 
Accrued Interest Payable 250 
Salaries, Officse 6.000 
Salaries, Officers' f|- to fac- 
tory) 7,000 
Renewals 5,000 
Power 10,000 
Watchmen f| to factory) 2,0.00 
Depreciation ff to factory) 4,000 
Notes Receivable 8,000 
Hotes Hec.ei Table Discounted 3,000 
Notes JPayable 10,000 
Bonds Payable, 6^, 25 years, 

(issued Jan. 1, 1920, at 95) 100,000 

Bond Interest 3,100 

Discount on Bonds 4,900 

Insurance [^jb to factory) 2,500 

Unexpired Insurance 500 

Factory Supplies, l/l/20 3,000 

Factory Supplies Purchased 2^000 

General Taxes (2/3 to factory) 6,000 

Dividends Declared 5,000 

Dividends- Payable 5.000 

Capital Stoc"k 50,000 

Surplus 58.000 

^465.500 ^465:^00 



Final Inventorjes: 

Haw Materials, cost value $9,900, inarlcet value 

I'll ,000. 
Goods in Process J?, 000. 
Finished Goods 200 units (initial inventory 

all sold) . 
Factory Supplies $1,000. 
Required: Financial Statements as of December 
31. 1920. 

PROBLEM 1-B. 

A factory. "X" Manufacturing Company, uses a 
A2 



non-cost acGounting system containing the follow- 
ing books: (a) General Journal, Cb) Sales Book, 
(c) Cash Book, (d) Vouchers Payable Register, 
(e) General and Sales Ledgers (usual "T" accounts), 
The forms used were those shown in Chapter I, 

The balance *eet at January 1, 1919, was as 
follows : 



Cash 

Accounts Receiv- 
able : 
James Smith 
Thomas Walton 
Other Customers 
Notes Receivable 
Raw Materials 
Goods in Process 
Finished Goods 
Plant and Equip- 
ment 



#10,000 



3,000 

E.OOO 

0,000 

6,000 

26,000 

17,500 

20.000 

150,000 



^258.500 



Vouchjers Payable 

Notes Payable 

Accrued Bond In- 
terest 

Accrued Payroll 
(4/5 Direct La- 
bor) 

Bonds Payable, 6%, 
( Jan . 1 and 
July 1) 

Reserve for Bad 
Debts 

Reserve for De- 
preciation 

Capital Stock 

Surplus 



,000 
,000 

,000 



2.500 



100 



15 
100 

10 



.000 

,000 

',000 
,000 
000 



^258,500 



During the year "Uie following vouchers were ap- 
proved: "A" Company (terms, 2 per cent, 10 days), 
raw materials $160,000, machinery |5,000; "B" Com- 
pany (terms, net 30 days), newspaper advertising 
$500; Payroll, productive labor $2.50 000, unproduc- 
tive labor $10,000, office salaries $5,000 sales- 
men's salaries $7 500; Olii er Creditors (terms, 2 
per cent, 10 days), raw materials $00,000, factory 
supplies $6,000, Bond Interest, $6,000. All cred- 
itors paid within discount terms, except "B" Com- 
pany, which remained unpaid, no discount being re- 
ceived on balan6e shown in balance sheet. 

Credit sales (terms, 8 per ceaat , 10 days), John 
Jones $6,000, James Smith $7,000, William Tobin 
$6,000, Other Customers $550,000. All accounts 
receivable were closed except the Other Customers 
A3 



account, the balance of which was |30,000. Will;iam 
To bin was the only ciistonier v^o took the discount. 
John Jones went bankrupt and paid 50 cents on the 
dollar; James Smith^gave his non- interest-bearing 
note for $2. 600. 

Notes receivable (non- interest-bearing) amount- 
ing to $5,000 were collected and all notes payable 
(non-interest-bearing) were paid. Additional re- 
serves established: bad debts |7,500, depreciation 
$15,000. Final Inventories: r&w naterials |50- 
000; goods in process $25,000; finished goods 
$40,000; factory supplies |l,000; accrued bond 
interest $3,000; accrued productive labor $3,000; 
accrued unproductive labor $750. 

Write up and close the books and prepare finan- 
cial statements as of December 31, 1919. 



PROBLM 2-A. 

Assuming that all of the accounts in a cost 
accounting system were included in one general 
ledger, jourrialize the following transactions, 
post the entries, and make financial statements. 

Capital stock issued at par for $100,000 cash; 
cash purchases, -ib.w materials $2,000^ plant $50,- 
000; credit purchases, raw materials, $24,000, 
factory supplies |l,500; payroll paid in cash, 
productive labor $50,000, unproductive labor 
llO.OOO; materials issued $20,000; facto ly sup- 
plies issued $1,000; depreciation reserve set up 
of 10 per cent; accrued payroll,- productive labor 
$1,000, unproductive labor .|200; productive labor 
and factory expense charged to goods in process; 
cost of goods completed $75,000; goods which coist 
$70,000 sold for $90,000; one-half of accounts 
receivable collected; three-f ifUis of accounts 
payabl e paid . 

A4 



■PHOBLM 2-B, 

Continue xhe set of boolcs used in tae foregoing 
problem, journalise the following trsnsaoti ons, 
post the entries, and rcake finanoial statements. 

Credit purchases of raw materials ^40,000; cred- 
it sales |80,000« Caski pa^Tnents: Payroll (one- 
fifth unproductive) |55,0Q0, factory supplies |750, 
accounts payable ^42,000 ($3,000 discount on pur- 
chases received), repairs |l,000. power $2,000, ad- 
vertising $1,;600, legal expense fbOO, t&xes |250., 
Cash receipts: Accounts receivable $110,000 ($2,500 
discount on sales allowed), sale of -maohjne at 
close of year tSOO (cost |l,000)» |5,000 written 
to deprecistion reserve: accrued productive labor 
f750, acQrusa unproductive JBbor floO, Pinal in- 
ventories: xia?^ materials $5,000; factory supplies 
|260; goods in process $17,160; finished goods 
$10,000, Productive labor and facto ly expense 
v/ere charged to goods in process. 



VnOBhSU 2-0. 

The Ohio Manufacturing Company comm^ced busi- 
ness on January 1, 1918, (.vi th a paid-in' cash cap- 
ital of 1100,000, 

The transactions for the year 1918 were as fol- 
lows: Purchases on credit. Land $5,000, Buildings 
$20,000 Maohinary and Equipment $30,000. Raw Ma- 
terial |l00,u00. Factory Supplies and Expenses 
$10,200, and Office Expenses $3,000. 

The cash payments for tiie year incluaed, 
:B*actory produotiva L-abor $40,000, Factory Non- 
productive Labor $20,000, Offiaers' Salaries 
|lO,000, -Other Office Salaries $8,000, and 
Salaries and Eiepenses of Salesmen $10, 000* 

Inventories at December 31, 1916 were: P.aw 
Material |E0,000, Factory Sujn^lies |1.000, mid 
Work in Pro3#sa amounting to |30, 000, two- 
thirds of 1^1 oil amoant wa^ for materials and 
one- third for productive labor. 

k6 



The open Accounts Reoeivable amounted to 
000. after charging off $1,000 for bad debts ;'aiid 
the Accounts Payable amounted to'|l8,200. 

The units completed during the y&ar amounted 
to 10,000, of which 8,000 were sold at $20 each. 

Provide 10% depreciation on-Machineiy and 3% 
on. Buildings . 

You are required to prepare a Balance Sheet 
and a Profit and Loss Statement as of December 
31, 1916. (Prorate burden on basis of productive 
labor. ) 
(From Ohio G.P.A. Examination; October, 1919.) 



PROBLEM 2-D« 

The balance sheet of a factory as of December 
31. 1921, was as follows: 



Cash 


$2, 


.000 


Ac oo lints Receiv- 






able 


6 


,000 


Notes Receivable 


3, 


,000 


Raw j^aterials 


7, 


,500 


Goods in Pro cess 


7, 


,000 


Fijaished Goods 


8, 


,000 


Factory Supplies 


1, 


,000 


Unexpired Insurance 


500 


Machinery and Equi 


P 




ment 


15, 


,000 


Plant 


25, 


,000 




f74. 


:ooo 



Aooounts Payable |3 


,000 


Notes Payable 1 


,000 


Accrued Product- 




ive Labor 1 


.500 


Accrued Unproduct- 




ive Labor 


500 


Reserve for Bad 




Debts 


500 


Reserve for Depre- 




ciation - 10, 


,000 


Capital Stock 60, 


,000 


Surplus 7, 


,500 


$74, 


006 



During 1921,. the reserve for bad 
ed with $1,250 and credited with |1, 
reserve for depreciation was credit e 
A machine costing $1,000 (accrued de 
was sold for $700 cash. Finished go 
000 were sold f^>r flOO 000. Raw mat 
on credit amounted to |40,000, while 
cost |4o,000. ,,Payroll (f productive 
$30,000 was Paid and $31,000 was cha 
pTocess and mdrnufac turi ng expense. 



debts was debit- 
000, mile the 
d with $7,500. 
preciatl on $260} 
ods coating $7E,- 
erials purchased 
amount issued 
) amounting to 
reed to ^oods ^^ 
Pactoiy gjupplies 



costing 1 1,600 were issued to the factory and y^ne- 
half .of tiie insurance expired. Finished goods com- 
pleted cost ^79,000. Gash collections: Accounts 
receivable |llO,000., notes receivable $7 ,000 . 
Cash payments: Accounts payable §92,000; notes' 
.payable $4,000. 

Required: A balance sheet as of January 1, 
1921. 



PROBLSiVr^-A. 

The manufacturing corporation mentioned in 
Problem 2-B closed its ledger and opened a factory 
ledger, containing accounts for general ledger, 
raw materials, goods in process., finished goods, 
factory supplies, manufacturing expense, product- 
ive labor, accrued productive labor, and accrued 
unproductive labor, and a general ledger containr 
ing the other accounts. Separate journals were 
opened for each ledger. 

Starting with the final balance sheet figures 
ascertained in Problem 8-B, journalize the follow- 
ing information, c-lose the boo'k:s,.aad make finan- 
cial statements. 

Credit purchases: Rav/ materials $45,000, new' 
machinery |5,000, and factory supplies |l, 000. 
Cash payments: Productive labor |50,000,, unpro^ ^ 
ductive- labor $12,000, taxes $250, insurance ftlOO, 
advertisir^g $1 400 , legal expense $750, repairs 
|l,250, power ^1,750, salesmen's salaries |l,000, 
and accounts payable |55,000. Cash receipts: Ac- 
counts receivable, $130,000. PJnal inventories: 
Raw materials $7-, 500,^ goods in process $7,150, 
finished goods |;32,560, accounts receivable ^^5,000, 
accounts payable $l-,000, reserve for depreciation 

J 14,800, reserve for bad debts |500, accrued'.pro-^' 
uctive labor $500, accrued' unproductive labor '_ 
^100, factory supplies $250, and expense accounts 
nothing. Sales totaled ^25 .000 . Discounts and 
allowances to customers amounted to $1,000.. 
There were no returned sales or returned pur- 
chases. 

A7 



PROBLEM 3-B. 

Continue the books and aooounts used in Problem 
3-1, maKe the proper entries for recording the fol- 
lowing data, close the dooks, aad make the final 
financial statements. 

The vouchers approved and paid v/ithin the dis- 
count periods were; "K" Company, terms 2 per cent, 
10 days, raw materials $20,000; *'L" Company, terms 
8 per cent, 10 days, machinery JlO,000; '*M" Company, 
terma 10 per cent trade discount, raw materials 
(list priae) $20,000; "N" Company, terms net, fac- 
tory supplies $1,200; office payroll: salesmen's 
salaries $300, office salaries ^^^00; factory pay- 
roll: productive labor $50,000, unproductive labor 
$6,000. 

The cash receipts were: Collection of accounts 
receivable $147,000 (2 per cent cash discount was 
allowed), sale of machineiy $10,000 (accrued booked 
depreciation $3,000, cos t^ price $16,000). 

Final balances: Hesei^ve for depreciation 1 16, 800, 
reserve for bad debts (after writing off |l,000 of 
bad debts) $1,500, acGounts receivable (gross prof- 
it percentage "oased on sales was 2d per cent) 
$14,000, accrued productive labor $750, accrued 
unproductive labor $150, productive labor nil, 
factory supplies $200, manufacturing expense nil, 
finisiied goods $22,550, and goods in process 
$1,700. 



PBOBIEM 3-0. 

The main office of a manufacturing conoem 
keeps the general books of the company and sells 
the finished product, vtiioh is billed to it by 
the faotory at cost. The cost books of the fac- 
tory show th.e following facts on January 1, 1914; 

Cash fond (imprest) $500; raw materials and 
supplies $15,910.32; work in process, made up of 
material and. di reot labor, $56,816.25, faotoiy 
exper^ses ftlO,59E«16, and nanagemi^nt expenses f6,- 
AS 



200.83; finished product $40,219.57. A portion 
of the payroll distributed but not yet paid, $3,- 
553.42. 

During the year 1914 the transactions were as 
follows: Purchases of rav/ materials, $91,113.20; 
wages p&id, |143, 275.49; factory expenses charged, 
$63,383.83; management .expens es charged, $40,315.- 
33; sale of power to another company occupyirxg ad- 
jacent buildings, ^100 per month. 

The raw materials snd supplies used amounted to 
|90,265.72; the management charges distributed, to 
840,315.33; and factory expenses distributed, to 
$63,519.10. There are also on hand unpaid local 
bills v\hi ch have not been entered on the books, 
amounting to |>135.27, all of ^-^li ch were for facto- 
ry expense. 

The finished product made during the year,- fig- 
ured at cost, amounted to $336^65 2.32, the amount 
of finished product transferred to the main office 
was $340,192.45. 

At the close of the year, Lecanber 31, 1914, 
there was unpaid and undistributed the factory pay- 
roll for four days, amounting to $2,942.10, and al- 
so 550 hours of overtime, payable at the rate of 
time and one-quarter, the regular day rate being 
553^ per hour. 

Write up all the ledger accounts on the Daictory 
booKs and shov; the final trial balance of Decsuber 
31, 1914. 

( From Massachusetts C.P.A. Examination, October 
•1915.) 



PROBLEM 3-D. 

On January 1, 1914, The Arlington Company* a 
records show the following conditions of its ao- 
CO unt s : 

Inventory of raw materials, |46,864.26; acoraed 
:factory payroll,- applied end distributed, |8,495.34 
goods in process at prime cost, |l91,665.32, the 
further value of $24,111.51 for the factory overhead 

A9 



also $36,224.76 to cover superintendence; finished 
goods in stock show a total cost of $64,968,03. 

During the period from January 1 to December 31, 
1914, purchases of raw materials amounted to $241.- 
249.36; factory payrolls, f 3?7 ,381 .70 ; superin- 
tendence, |114,300; factory expenses including 
wage's not applied to cost accounts, ^*74,538; in- 
terest paid on notes, $3,600; dividends received, 
|16,012. 

During the period mentioned, the operations 
in the factory comprised: Raw materials requisi- 
tioned for consumption, |239,461.02; wages ap- 
plied and distributed to manufacturing cost, 
1360,751.20, and to factory expenQSQ, 4^7 ^87Q .17 ^ 
included in ttie sum stated in the paragraph above. 

There were also forwarded from the factory to 
the warehouse, finished goods at prime cost, cov- 
ering materials, ^235,627.74, and labor, $355,001- 
.25. ■ The cost of goods sold during the year was 
$7 5 5, 849. 70, and the proceeds from the goods sold, 
$907,019.64. 

On Deconber SL , 1914, the goods in process in- 
cluded, in addition to prime cost, factory over- 
head amounting to |25,317.06, and superintendence, 
$38,035,98, and accrued factory payroll, applied 
and distributed, amounting to |3,743.01. 

Show the cost controlling accounts as they 
would appear in- the general ledger, their opera- 
tion, and the resulting net profit. 

(Prom New York C.P.A. Examinati'on, June, 1914.) 



PROBLEM 4- A. 

As til e "X" Manufacturing Company wished to 
change its accounting system (described in Problem 
1-B) from a non-cost to a cost basis, it installed 
the requisition journal, returned materials 
journal and sales book shown in Chapter II and 
a finished goods Journal with money columns for 
"finished goods Dr." and for "goods in process 
Cr." 

AlO 



Purciiased from "A" Company raw materials^ fl25,- 
000, "C" Company factory supplies |7 ,500 . "D" Com- 
pany machinery |>2,500. Other vouchers payable ap- 
proved: Bond interest |6,000; payroll: productive 
labor |200,000, unproductive ' labor |9,000, office 
salaries $6,000, salesmen's salaries $6,000. All 
■vouchers payable, except amount due to "D" Company 
(no discounts received except $10,000 from "A" Com- 
pany], were paid. 

Sales to William Tobin $6,000, Thomas Walton 
$75,000. Other Customers $425,000.. All accounts 
receivable except amount due from Thomas V/alton 
closed (no discounts allowed except^oOO to V/ill- 
iam Tobin). Gross trading profit was 100 per cent 
of CO st of sales . 

Issued to factory, materials $135,000, factory 
supplies f7,Q00. Unused raw materials returned 
from factory to storeroom .f^ ,000. Accrued payroll: 
productive jabor $5,000,. unproductive labor $1,750. 
Accrued bond interest $3,000, Additions to reserves 
depreciation §15,000, bad debts. $1,000 . Various pro- 
duction orders completed cost §375,000. 

Starting from the balance ^eet as of January X^ 
1920,' record the above information, close the books^^ 
a^d prepare financial statements as of December 21, 
1920. 



PROBLEM 4-B. 

uraft accounts from the following figures- rela- 
tive to a factory, the system being that the facto- 
ry charges the head office with goods shipped at the 
ruling marlcet wholesale price, which during the year 
1916 totaled |395',950. 

The head office paid for raw material $201,995 
(of this $2,000 v;as ovang January 1, 1916); for new 
plant |55,470; for productive wages $79,015; for non- 
productive wages |9,950; for factory management $10,^ 
000; and for power, fire insurance, wortimen's compea"^ 
sation, taxes, etc., $15,950. 

All 



12/31/15 


12/31/16 


169,982 


$91,65;^ 


41,831 


38.761 


11,758 


13,582 


1/1/16 


50,000 


do. 


185,000 


do. 


44.000 


1916 


266.792 



Invent ori es: 

Raw Materl al 

Progress 

Tinlshed 
Keal Estate and Buildings 
Plant, Maohineiy and Equipment 
Depreciation Reserve 
Pur eha s e s , Raw Ma t eri al 

The factory books show that ^265,000 material was 
issued from stores and charged to vijork orders; over- 
heads unallocated to wo rlc orders, Deoenber 31, 1916, 
|995; wages accrued., tut not due, December 31, 1916, 
productive, 1 1,559. and nonproductive, §195. 

Depreciation plant, machiner^^, azi^i equipment: 
Write 6?o off opening balance for year^ Drills and 
lathes v^ioa cost $45, 965. and in respect of v^^^ich 
f7,545 depreciation had been credited depreciation 
reserve, were replaced by new drills and lathes cost- 
ing $55,470, t^ e old ones realizing on sale, $6,000. 
(From Ontario C. A« Sxam^i nation, 1917,} 



PROBLEM 5- A. 

The "X" Manufacturing Company continued, dur- 
ing 1921, the same system of booJcs mentioned in 
Problem 4-A. but discarded the "goods in process" 
account and in lieu thereof poated the material 
and direct labor charges to the "g^^ods in process- 
prime cost" account and prorated th® factory over- 
head out of 13b e "manufacturing expense" account 
only on the completion of a job, aad installed 
"subsidiary ledgers for the "raw materials", 
"goods in process - prime cost", and "finished 
goods" accounts. The "goods in process - prime 
cost" ledger had the "T" accounts for each pro- 
duction order or job, while the other subsidiary 



A12 



ledgers had special coliimns. both debit end ored- 
it, for "number of units" £tnd "prioe". In keei>- 
ing with these changes the finished poods jour- 
nal, shown in Chapter IT, was installed and the 
"goods in process" balance was closed. |ll,815 
to the "goods in process "-prime cost" account 
and ^2,185 to the "manufactuilng expense" ac° 
count. Factory overhead v/as prorated on the as- 
s'jLmption that, it would be S3 per cent of the 
cost of materialSo 

The initial inventories were: 



Raw '~~ ~ i |i Finished 

Materials! Units JPrice jj Goods 



#2 
#3 
#4 

#6 



Units Price 



4,000 
1,000 
2,000 

2,000 
5.000 



?.50 
9 ,00 

10,00 
15,00 



#2 

#3 

#6 



10,000 
20,000 
30,000 
40,000 
50,000 



.15 
.20 

.40 
,30 



The production orders issued were: 


No. 


Proposed 
Production 


Charges Pri or to 
J anus i^- 1 


Date 




Pini^ed 
Goods 


Units 


Materi al 


Labor 


Completed 


1 

8 
3 


fi 

#4 


10,000 
5.000 
9,000 


$7,000 

2,500 

nil 


$2,000 
315 
nil 


Jezi» E? 
29 

Unco mple tea 



On Januai^ 1, $2,400 was paid to "H" Insur^o® 
Company fos" a fLr© insurance policy on the factoi^ 
for 1921,,^d |7,500 was paid to "S" Company for 
factory supplies » 

On January 14, the following raw materials w@r@ 

furchEsed from "A" Company: #1 15,000 units |9 000 
2 85,000 units 15,000, #3 10,000 units $1,500 
■f4 45,000 units |18.,000, #5 10.000 units $3,000 • 
On Januaiy 31, "S'"' Power Company was paid |8,000 
for J&nm.T^ power, 

During Januai^. the following payroll was- paid: 
productive labor |37,750, unproductive labor Is.TiO 
office salaries |dOO, salesman's salaries- |700. '4^- 
orued payroll at end of month was: productive 3afeor 
$4,000, unproductive labor |;600. An analysis of 



A13 



t]ae time reports showed that th-e productive la"bor 
was chargeable as follows: Job #1 $23,800, Job #2 
$7,636, J9b #3 |5,315. 

Raw materials issued (assume oldest ipaterial 





. X J. o u > 

Mate- 




For 




Mate- 




For 


Pate 


rial 


Units 


Job 


Date 


rial 


Units 


Job 


Jan. 5 


#1 


5,000 


#1 


J an. 15 


#1 


12,000 


/?2 




#2 


10,000 


#1 




#4 


39,500 


#2 




n 


20., 000 


#1 




#5 


30,000 


.#2 


Jan. 10 


#1 


4,000 


#2 




#5 


30,000 


#1 




#4 


40,000 


#1 




#2 


20,000 


#3 


Jan. 15 


#1 


3.000 


f3 




P 


14.000 


#3 



On January 20, 5,000 units of raw material 
tJ^S , which were requisitioned for Job #2, were 
returned to storeroom. 

The expired inauranc-e was written off, |100 
oredited to "reserve for bad debts," |l, 500 cred- 
ited to "reserve for depreciation," and factory 
supplies costing .$5,659 issued and consumed. 

On January 31, the follow^ing sales (assume 
oldest stock issued first and gross profit on 
sales 100 per cent of the cost of sales) were 
shipped: 





Terms 


Units of Finished Goods Sold 


Customer 


n 


■ #2 


¥^ 


n 


#5 


William Tobin 
James Smith 


net 
net 


5,000 
nil 


1,000 
nil 


bUU 
nil 


nil 
2.000 


nil 
S.OO'O 



All accounts receivabl 
the William Tobin account 
able were paid The note 
leoted in full. The bond 
terest were paid on Janua 

Starting from the bala 
1, 1921, record the above 
"books, aiid_ prepare f inane 
January 31, 1921. Assume 
on hand have a market val 



e were collected except 
and all vouchers pay- 

s receivable were col- 

s with accrued bond in- 

ry 1. 

nee sheet as of January 
information, close the 

ial statements as of 
that the raw materials 

ue of $8,500, 



A14 



PROBLEM 6-A. 



The "X" Manufao taring Company continued, dur- 
ing Feloruary, 1921, the same set of hoots as was 
used in January (see Prohlem 5-A.) . However, the 
method of prorating overhead was changed from the 
"cost of material" hasis to the "cost of product- 
ive labor'' basis (assumed that burden was 15 per 
cent of productive labor). During the month Job 
#3 was completed (February 26), and Job #4 was 
started but not completed. 

On February 1, the follov/ing materials were 
received, terras 2 per cent, 10 days, payTnent be- 
ing made on February 10: From "X" Company raw ma- 
terials #1 9,000 units at $.50, #2 30,000 units 
at $.23, #3 24 000 units at $.20, #4 50,000 
units at |.40, fb 45,000 units at $.40; from "Y" 
Company special materials for Job #3, $1,000; from 
"2" Company factory supplies $2,500v^ 

The raw materials requisitioned froE^ storeroom, 
charged on the "average cost" rather than the 
"first- in, first-out" principle, were: 



Units 0? Raw Materials 



Date 



Feb, 



For 
Job 



73 

J4 



JL 



nil 
10.000 



.^2_ 



10,000 
35.000 



#3 



20,000 
10.000 



"?r 



46,500 
16.750 



m 



30,000 
20.000 



7,750 units of rav/ materials #4, requisitioned 
for Job #3, were returned on February 8 to store- 
room. 

The payroll paid during February was classi- 
fied as follows: Productive labor $39,685, unpro- 
ductive labor $2,000, office salaries $500, sales- 
men's salaries $700. On February 28 the accrued 
payroll was: productive labor $5,000, unproduct- 
ive labor $750. The time reports for the month 
shoY/ed that productive laboo: was chargeable $34 - 
685 to Job #3 and $6,000 to Job #4. 

Expired insurance was written off, $1,000 was 
credited to "reserve for bad debts," $1,600 cred- 
ited to"reserve for depreciation," and factory 
supplies costing $1,156 issued and consumed. A 
machine costing $3,000 (accrued depreciation 
A15 



since date of purchase $B,000) was sold for |l,- 
500, 

Sold .to Thomas Walton for |176,000. subject 
to a trade discount of 10 per cent finished goods 
#1 1,000 units, #2 5,000 units, #3 1,000 unjts. 
Sold to James Smith for |93,800, terms 2 per cent, 
10 days finished goods #2 5,000 units, -#3 500 
units, #4 500 units; to Other Customers for |246 , 
200, terms 2 per cent, 10 days, finished goods #4 
9,600 units, #5 2,000 units. Assume that all 
sales were made after the completion of Job #3, 
issued goods being charged out at average cost. 
Within the discount periods |91,924 was received 
from James Smith, and |196,000 from Other Custom- 
ers. Thomas Walton and William Tdbin also settled 
their accounts. A dividend of |500,000 was paid 
in cash. 

Starting from the balance sheet as of February 
1, 1921, record the above infoiraation, close the 
books, and prepare financial statements as of Feb- 
ruary 28, 1921. 



PROBLEM 7 -A. 

During March, 19E1, th-e "X" Manufacturing Com- 
pany continued the" set of general books and the 
"goods in process - prime cost" subsidiary ledger 
used in Pebruaiy (see Problem 6-a). The old "raw 
materials" and "finished goods" subsidiary ledgers 
were replaced by those shown in Chapter's 7 and 
XIII, respectively. 

The method of valuing issued raw materials and 
finished goods was changed to the "first-in, first- 
out" basis. Overhead was prorated to production 
orders on the assijmptlon that burden was 10 per 
cent of; prime .cost (the $900 manufacturing expense 
©?i initial balance sheet to be included in prora- 

On March 1, the following purchase orders were 
i>laa©d (terms net): 

A16 



No 



Supplier 



Material #1 



Unl ts 



J03t 



Material"T2 



Jnits Cost 



Materi al 



Unit; 



'os.t 



'X" Compari^, 
'Y'^ Company,: 



^0,000 

nil 



nil 



50,000 
10.000 



f: 



il 
50 000 



nil 
1.80 



The three ra-w material received reports issued 
were: 





Purchase 
Order 


units of Raw Material 


No. Date 


n 


n 


#3 


1 Mar. 1 

2 2 

3 4 


^1 
#2 


10,000 

nil 
10.000 


25,000 

5,000 

25.000 


nil 

50,000 

nil 



The six- raw material requisitions issued were: 





Date 


For 
Job 


Units 


of Raw Material 


li[0. 


#1 


#2 


#3 


1 


Mar. 1 


H 


200 


nil 


nil 


2 


3 


#4 


nil 


20,000 


nil 




4 


#4 


nil 


nil. 


5,000 


4 


5 


#4 


nil 


6,000 


nil 


5 


28 


f^ 


6,000 


nil 


nil 


^ 


30 


t^ 


nil 


nil 


15 opo 



A summary of the time tioicets shovjed that the 
productive labor was chargeable $38,450 to Job #4 
and |6,500 to Job #5. The pa.yroll paid during 
March was classified as foll9v;s: Productive labor 
|43,590, unproductive labor $2,000, office sala- 
ries |500, salesmen's salaries |700. On March 51 
the accrued payroll was: Productive labor |6,360, 
unproductive labor $360, 

On March 1, the plant site and buildings, cost- 
ing |81,000, were sold for $50,000 cash (accrued 
depreciation $30,000) « Tools costing $B,500 were 
placed in a separate account (accrued deprecia- 
tion ll^OOO closed into tools account). Unexpired 
insurance of |l,800 was transferred v/lth buildings 
and payment in full received therefor. 

During the month the following bills were ap- 
proved and paid: Rent |oOO, light and heat §20, 
and pow@r $2,000* Final balances: Unexpired in- 
surance $180, faatory supplies $1,435, tools $V,- 
300, eooruQd taxes $50, reserve for depreciation 
$15,660, reserve for bad debts $10,300, accounts 
r@o^ivabl® $50,000, vouafeers payable ( "Y'^ Company ) 
$11,850, ri^w mat ©rial (market valu^) $19,000. 

Air 



The two production orders worked on were 



"Wte 
Completed 



Frodu3tion 
Report 



^o. 



Proposed Production 



Finished Goods Units 






10.000 
1.500 



Maroh 31 
31 



Shipping report #1, dated March 31, showed sale 
to Other Customers of 1,000 units of finished goods 
fl at $15 and 8,000 units of finished goods #3 at 
|l6. 

Starting from the "balance sheet as of March 1, 
1921, record the above information, close the hooks, 
and prepare financial statements as of March 31, 
1921. 



PROBLEM 8-A. 

During April, 1921, the ^'X" Manufacturing Com- 
pany continued the set o'f books and records used 
during March (See Problem 7-A) . However, as it wa 
decided to prorate factory overhead to production 
orders on the basis of productive labor hours, an 
extra column was ruled in the "goods in process - 
prime cost" subsidiary ledger for the purpose of 
recording the labor hours applicable to each job. 
The hourly burden rate was calculated on the assump- 
tion that the factory expense woul.d be $1,000 more 
in April than it had been in March and that the 
productive labor hours would total 62,000. 

Material received report #4, dated April 20, 
showed final deliTery on purchase order #2, The 
two raw material requisitions issued ware:^ 





Date 


For 
Job 


Units 


of Raw Material 


No. 


^1 


#2 


#3 


7 
9 


Apr. 7 
19 


#7. 


6,050 
180 


lo.ooo 

6.000 


4,000 
16,000 



The following table shows the analysis of the 
month's payroll. On Saturday, April 30, office 
employees were paid |500, and salesmen were paid 
$700. Workmen were paid every Saturday, workmen 
1-100 getting |.80 an hour, workmen 101-200 get- 
ting $.'70 an hour, and workmen 201-300 getting 
$.60 an hour. 

A18 





WorlCrnen 


Labor H 


ours Chargeable to 


Date 


Job 


Job 


Over 






#6 


#7. 


head 


Apr. 1 


1-100 


eoo 








101-200 1 




300 






201-300 


600 


160 


150 


2 


1-100 
101-200 


800 


300 






201-300 


600 


150- 


150 


4 


1-100 
101-200 


800 


300 






201-300 


600 


160 


150 


5 


1-100 
101-200 


800 


800 






201-300 


500 


150 


150 


6 


1-100 
101-200 


800 


800 






201-300 


600 


150 


150 


7 


1-100 
101-200 


800 


800 






201-300 


600 


150 


160 


8 


1-100 
101-200 


800 


800 






201-300 


600 


160 


160 


9 


1-100 
101-200 


800 


800 






201-3a0. 


600 


160 


160 


11 


1-100 


600 


300 






101-200 


160 


660 






201-300 




660 


150 


12 


1-100 


400 


400 






101-20Q- 


400 


400 






201-300 


400 


260 


160 


IS 


1-iOO 


400 


400 






101-200 


400 


400 






201-300 


.400 


250 


160 


14 


1-100 
101-200 


800 ; 
800 








201-500 


660 




150 


15 


1-100 


400 


400 






101-200 


400 


400 






201-300 


A19 


660 


150 





Workmen 


Labor :-: 


ours Chare:eable to 


Date 


Job 


Job 


Over- 






#6 


#7 


head 


Apr. 16 


1-100 


400 


400 






101-200 


40.0 


400 






201-300 


G50 




160 


13 


1-100 

101-200 


660 


150 
800 






201-300 


400 


250 


150 


19 


1-100 
101-200 


^00 


600 






201-300 


400 


260 


150 


20 


1-100 
lOi-200 


800 


800 






201-300 


400 


260 


150 


21 


1-100 
101-200 


800 


600 






201-300 


400 


260 


150 


28 


1-100 
101-200 


800 


700 






201-300 


300 


360 


150 


23 


1-100 


400 


400 






101-200 


400 


400 






201-300 


300 


350 


150 


26 


1^100 
101-200 


800 


800 






801-300 


400 


250 


150 


ge 


1-100 
101-200 


800 


800 






201-300 


400 


260 


160 


27 


1-100 


800 








101-200 


400 


400 






201-300 


400 


260 


150 


26 


1-100 
101-200 


800 


800 






201-300 


400 


250 


150 


29 


1-100 
101-200 


800 


800 






201-300 


300 


360 


150 


30 


1-100 
101-200 


800 


800 






201-300 


400 


250 


150 



AW 



During the month the following "bills were ap 
proved and paid: Rent on factory $500, light and 
•heat |20, power .|2,000. faotory supplies f6,000, 
and tools |l,000. ?inal balances: Unexpired in- 
surance $160, factory supplies $3,470, tools 
$8,100, accrued taxes |1G0, reserve for depre- 
ciation §16,300, reserve for "bad debts $10,500, 
accounts receivable $51,000, vouchers payable 
( "Y" Company) $12,500. Dividend of $250,000 was 
declared and paid. Raw materials on hand April 
30, 1921, had a market value of |10,000-. 

The two production orders v/orked on were; 



1^0 » 



Proposed Production 



Finished Goods lUnits 



Date 
Completed 



Production , 
Keport 



#1 

#2 



4,000 
3.500 



April 30 
30 



Shipping report #2, dated April 30, shov/ed de- 
livery to Other Customers of 3,000 units of fin- 
ished goods #2 at |15 and 2,500 units of #1 a.t 
tl3 . 

Starting v/ith the »"t)a lance sheet as of April 1, 
1921, record the above information, close the 
books, and prepare financial statements. as of 
April 30, 1921. 



PRO ELM 9-A. 



During May, 1921, the "X" Manufacturing Com- 
pany continued the set of books and records used 
during April (See Problem 8-A), except that the 
machine hours were recorded in the '^goods in 
process - prime cost" subsidiary ledger, instead 
of the labor hours. It was decided to prorate 
factory overhead on the basis of macliine hours. 
The hourly burden rate was calculated on the as- 
sumpt-ion that the faotory expense would be. tiie 
same in May as It had been in April, and that 
each of the 55 machines would run 200 hours dur- 
ing May # 

On May 2 an order was reoelTed from Other 

Customers for 5,000 units of finished goods #1 

A21 



at $16 and 2,000 units of finished goods #3 at 
|17. Shipping report #3, dated May 3, shov/ed 
delivery of 1,200 units of finished goods both 
#1 and #3^ and shipping report #4, dated May 16, 
showed delivery of remainder of order. 

On May 4, the following raw material received 
report was issued for a purchase from "A" Compa- 
ny, terms 2 per oent, 10 days (payment made May 
13) 





Purchase 
Order 


Material j^l] Material f^ Material #3 


No. 


Units 


Price 


UnUs 


Price 


Units 


Price 


5 


f^ 


15.000 


$.50 


25.0D0 


$.20 


50.000 


$.25 



The four raw material requisitions issued 
were: 





Date 


For 
Job 


Units of Haw Material 


No. 


n 


#2 


#3 


9 
10 
11 
1§ 


May 2 

2 

10 

16 


#9 

8 


8,000 
nil 

34 
10.576 


nil 

14,000 

nil 

nil 


10,000 

nil 

8,600 

nil 



Workmen 1-100 work:ed on machines, type ttI. 
four men to a machine; woricmen 101-200, on type 
^2, five men to a machine; workmen 201-300, on 
type #3, ten men to a machine. April wage scales 
were continued, the new laborers, v;orkmen 301-320, 
"being paid $.50 per hour. Worianen vWere paid every 
Saturday; office salaries of $500 and salesmen's 
salaries of $700 were paid on Tuesday, May -31. 





Worlonen 


Labor Hours Chargeable to 


Date 


Job 


Job 


Over- 






#8 


#9 


head 


May 2 


1-100 
101-200 


800 
800 








201-300 


650 


150 






301-320 






160 


3 


1-100 


800 








101-200 


650 


160 






201-300 


650 


150 






301-320 






160 


4 


1-100 


650 


150 






101-SOO 


650 


150 






201-300 


650 


150 






301-320 






160 






A2a 









Worlanen 


Labor Hours Chargeable to 


Date 


Job 


Job 


Over- 






#8 


#9 


head 


May 5 


1-100 


400 


400 






101-200 


400 


400 






201-300 


400 


400 






301-320 






160 


6 


1-100 


150 


650 






101-200 


150 


650 






201-300 


150 


650 






301-320 






160 


7 


1-100 


bO 


"50 






101-200 


50 


750 






201-500 


50 


750 






301-320 






160 


9 


1-100 


400 


400 






101-200 


400 


400 






201-300 


400 


400 






301-320 






160 


10 


1-100 


400 


400 






101-200 


400 


400 






201-300 


400 


4C0 






301-320 






160 


11 


1-100 


400 


400 






101-200 


400 


400 






201-500 


400 


400 






301-320 






160 


12 


1-100 
101-200 
201-300 
301-320 


600 
800 


800 


160 


13 


1-100 
101-200 
201-300 
301-320 


800 


800 
800 


160 


14 


1-100 
101-200 
201-300 
301-320 




800 
800 
800 


160 


16 


1-100 
101-200 
201-300 
301-320 


800 
800 


800 


160 



A23 





Workmen 


Labor Hours Chargeable to 


Date 


Job 


Job 


Over- 






#8 


#9 


head 


May 17 


1-100 


400 


400 






101-200 


400 


400 






201-300 


300 








301-320 






160 


18 


1-100 


150 


650 






101*200 


160 


650 






201-300 


400 


400 






301-320 






160 


19 


1-100 
101-200 
201-300 
301-320 


400 

800 


400 
800 


160 


20 


1-100 
101-200 
201-300 
301-320. 


800 

800 
800 




160 


21 


1-100 
101-200 
201-300 
301-320 




800 
800 
800 


160 


23 


1-100 


400 


400 






101-200 


400 


400 






201-300 


400 


400 






301-320 






160 


24 


1-100 
101-200 
201-300 
301-320 


800 
800 


800 


160 


25 


1-100 
101-200 
201-300 
301-320 


800 
800 


800 


160 


56 


1-100 


400 


400 






101-200 


400 


400 






201-300 


650 


150 






301-320 






160 


27 


1-100 


650 


150 






101-200 


150 


650 






201-300 


400 


400 






301-320 


A24 




160 





Woricmen 


Labor Hours Cha.rereable to 


Date 


Job 


Job 


Over- 






#8 


#9 


head 


-May ES 


1-100 


150 


660 






101-200 


400 


400 






201-300 




800 






301-3^0 






160 


31 


1-100 • 
101-200 


600 


200 
■800 






EOl-300 


400 


400 . 






301-320 






160 



On May 31, 2,000 units of raw materials #1,. 
formerly issued on requisition #12, were returned 
to storeroom on returned mat eri al memo #.le The 
two production orders worlced on were: 





Proposed Production 


Date 
Comjpleted 


Production 


NOe 


Finished Goods 


Units 


Report 


8 
9 


li 


4,000 
4,000 


May .31 
31 


^5 
#6 



During the month the follov/ing hills were ap- 
proved and paid: Rent on factory |500, light and 
heat |20, power |2,000, factory supplies |3,000, 
and tools |l,500. Final balances: Unexpired in- 
surance $140, factory^ supplies |3,216, tools |9,-' 
550, accrued taxes $150, reserve for depreciation 
$16,950, reserve for bad debts $10,700, aocountg 
receivable $55,000, vouchers payable { "Y" Company) 
§12,500, raw materials (market value) $19,480, 

Starting with the balance sheet as of May 1, 
1921, record the above information, close the 
books, and prepare financial statements as of May 
31, 1921. 



PROBLEM 10-A. 



During June, 1921, the "X" Manufacturing Com- 
pany continued the set of books and records used 
during May (See Problem 9-A)« As it- was decided 
to prorate overhead on the basis of the produs- 
tion hours of each of the 3 types of machines, 
the "goods in process - prime cost^ subsidiary 
A25 



ledger shown in Chapter XI v;as installed. 

It v/as decided to install a budgetary control 
of the expenses such as is discussed in Chapter 
X. A new "goods in process - factory expense" 
account was set up, and the heading of the rj ght 
hand column in the finished goods journal was 
changed from ''manufacturing expense" to "goods 
in process - factory expense." 

The machine-hour rate for each type of machine 
was calculated to the nearest cent on the assump- 
tion that the total factory expenses v/ould be the 
same as in iY.ay , that each of the 55 machines 
would operate 8 hours a day for 26 days, find that 
the total factory overhead was apporti enable to 
machine type #1 two -fifths, to #2 tv/o-fi f ths^ and 
to #3 ' one-fifth . The May wage scales and assign- 
ment of the workmen to the different machines were 
continued. Y/orkmen were paid every Saturday; of- 
fice salaries of $500 and salesmen's salaries of 



$700 were 


^ paid on 


June 30. 








Y^ORJCMEN 


LABOR HOURS CHAR 


GEABLi: TO 


PEPJ OD 


JOB 


JOB 


OVER- 


(June) 




#10 


#11 


HEAD 


1-4 


1-100 
101-200 
201-300 


3,200 
3,200 
3,200 








301-320 






640 


6-11 


1-100 
101-200 
201-300 
301-320 


4,800 
4,800 
4,800 




960 


13-18 


1-100 


4,000 








101-200 


4,000 


800 






201-300 


4.000 


800 






301-320 






960 


20-26 


1-100 


4,000 


800 






101-200 


4,000 


500 






201-300 


4,000 








301-320 






960 


27-30 


1-100 
101-200 
201-300 
301-320 




3,200 
3,200 
3,200 


640 



A26 



The 
were : 


two raw materi 


al rea^u 


isi ti ons 


issued 




Date 


?or 
Job 


Units of Haw Material 


No. 


#1 


#2 


#3' 


13 
14 


June 1 
13 


^10 

#11 


nil 
6.900 


28.000 
nil 


42,016 
nil 



^he tv^o produ3ti on orders worKed on were: 



10 
11 



proposed Production 



'inished Goods I Units 



Date 
_Gom£leted_ 



6.7401 June 27 

6 .QOOiUnoompletedJUnQO 



Produoti on 
Report 



#7 
mpleted 



Shipping report #5, dated June 30, showed 
sale to Other Customers of 6,000 units of fin- 
ished goods #1 at |17 and 4,000 units of fin- 
ished goods #2 at |l5. 

During the month the following bills were ap- 
proved and paid: Bent on factory, foOO, light and 
heat $20, ^ower $2,000, factory supplies $2,000, 
and tools .>?500. Pinal balances: Unexpired insur- 
ance. $120, factory supplies $1,960, tools |9,550, 
accrued taxes |200, reserve for depreciation $17,- 
600, reserve for bad debts f 10, 900, accounts re- 
ceivable $60,000, vouchers payable ( "Y" Company) 
812.500. raw materials ( marine t value) $500. The 
balance of the "manufacturing expense" account and 
the excess of the balance of the "goods in process- 
factory expense" account over the amount charge- 
able to Job #11 were closed into the "profit and 
loss" account. Dividend of $10.0,000 was declared 
and paid. 

Starting with the .balance sheet as of June 1, 
1921, record the above information, close the 
books, and prepare financial statements as of June 
30, 1921. 

PROBLEM 11-A. 

During July, 1921, the "Z" Manufacturing Com- 
pany continued the set of books and records used 
during June (See Problem 10-A) . The fixed ma- 
chine method of prorating overhead was continual 
A27 



sabiect to the following changes: Assumed that 
(a) "total factory overhead would equal $9,000, 
(b) each machine would operate 200 hours , (c) 
idle time would be taken care of by means of a 
-supplementary rate" based on June figures. The 
"supplementary rate" was calculated (carried to 
closest cent) and used as is shov/n in Chapter X. 

The June wage scales and assignment of work- 
men to the different machines were continued. 
Workmen were paid every Saturday; office salaries 
of $500 and salesmen's salaries of |700 were paid 



UXi Ud UU.J. ^'^t. 


L.T.. " — tf " 

WORKICEN 


LABOR HOUHiS CHANGEABLE TO 


PEKI03) 


JOB 


JOB 


OVEH- 


(July) 




#11 


#12 


HEAD 




1-100 
101-200 
201-300 
301-320 


1,600 
1,600 
1,600 




320 


5-9 


1-100 
10^-^00 
201- .300 
301-320 


4,000 
4,000 
4,000 




800 


11-16 


1-100 


2.400 


2,000 






101-200 


2,400 


2,000 






201-300 


2,400 


2,000 






301-320 






960 


16-23 


1-100 


1,000 


3,200 






101-200 


1,000 


3,200 






201-300 


1,000 


3,200 






301-320 






960 


25-30 


1-100 
101-200 
•201-300 




4,800 
4,800 
4,800 






_,i5Q,l-320 






960 



On July 6, the follov/ing raw material received 
report was issued for a purchase from "B" Compa- 
-n^ terms 2 per cent, 10 days (payment made on 
July 6). 

' Material #1 



No. 



'Purchase 
Order 



TT 



Units 

25.ooor 



Price 



Material #2 



Units Price 



$,6Ql^b.6oori»^ 



Material"?5 



Unit s {Price 
1 25, 0001 1. 20"" 



A88 



The 


two raw 


material requisitions issued were: 




Date 


For 
Jot 


Units of Rav/ Material 


No. 


^1 


#2 


#3 


16 
16 


July 7 
15 


#11 
#12 


1-6 , 340 
5,720. . 


nil 

25,000 


nil 
20.384 



On July 16, 15 units of raw materials #1, whioli 
had "been charged to Job #11 at $.60 eaoh , were re- 
turned to storeroom on returned material memo #2, 
The tv/o production orders v/o rice d on were: 



Proposed Production 



Date 
Completed 



Produo ti on 
Report 



No. 



i'inished Goods 



T2" 
#1 



UnitsI 



8.000 



:ompi 

Tui5 



uly IF 
Unoompretad I Un o 



11 
12 



#8 
ompleted 



Shipping report ^6, dated July ^0, showed sfele 
of 4,000 units of finished goods #2 at $18 to 
0th e r C us to me r s . 

. During the month the following bills were ap- 
proved and paid: Rent on factory $500, lierht and 
heat §20, power $2,000, factory supplies 83^000, 
and tools §800. Interest on investment of $650 
was charged to "manufacturing expense" and cred- 
ited to "reserve for interest on investment," Pi- 
nal "balances: Unexpired insurance $100, factory 
supplies |l,905, tools §10,100, accrued taxes 
$250, reserve for depreciation §18,250,- reserve 
for Dad debts $11,100, accounts receivable §62,- 
000, and vouchers payable ( "Y" Company) §12,500, 
raw materials (market value! $3,500, Interest on 
investment remaining on July 30 in the "goods in 
process - factory expense" and in the "finished 
goods #2" accounts was |200, 

The balance of the "manufacturing expense" ac- 
GOHnt and the excess of the bal an C of the "goods 
in process - factory expense" acG0\|iht over the 
amount (including supplementary raie amount) 
chargeable to Job j^l'Z was closed into the "profit 
and loss" account. 

Starting with the balance steet as of July 1, 
1921, record the" above information, close the 
books and prepare financial statements as of July 
30 , 19 21 . ' 

A29 



PROBLEM 12-A. 



During August, 1921, the "X" Manufacturing 
Company continued the set of book^ and records 
and the method of prorating overhead used during 
July (see Problem 11-A) . In calculating (to the 
nearest cent) the fixed nBChihe-hour rate to ap- 
ply duriiag August, the following data were used: 



Items 



Cost, each machine (dollars) 
Floor space (square feet) 
Electric current ( kilowatt- 
hours 



Machine Type 



#1 I #2 



1,500 
5,000 

15.000 



9TD- 
4,000 

9.000 



'W 



1.450 
1.000 

.000 



Manufacturing expenses were assumed to be act- 
ual expenses during July except that the factory 
supplies consumed Were assumed to cost |3,070, 
Overhead was prorated between the types of ma- 
chinery on the following bases: 



Elements 



Rent, light, and heat 

Power 

Tools, supplies, Insurance, 

unproductive labor 
All other elements 



Basis 



Floor space 
Kilowatt-hours 

Equally 

Cost of machine 



^ 



It was assumed that all the machines would be 
operated 8 hours a day for 27 days during August. 
The supplementary rate was calculated on the ba^ 
sis of the actual idle time during July. 

On August 1, the following raw material re^ 

ceived report was issued for a purchase from "A" 

Company, terms 2 per cent, 10 days (payment made 



Augus t 8 ) ; 














Purchase 
Order 


Material t^I 


Material i^t 2 [Material #3 


No. 


Units 


Price 


Units Price 


Un it s 


Price 


7 


, ,f5 


^0.000 


^.oO 


15.00C S.20 


S4.000 


$*Sb 



The two additional raw material received re- 
ports issued were for special materials^ terms net . 



No. 



Date 



Supplier 






Purchase 
Order 



For 
Job #12 



|2,000 
nil 



For 
job #13 



nir 

$133 



Aug. 3 
22 



"B "Company 
"C "Company 



#7 



A 30 



The four raw material requisitions issued were: 





Date 


For 
Job 


Units of Raw Material 


No. 


n 


#2 


#3 


17 
18 
19 

20 


Aug. 1 
8 
16 ^ 
22 


#12 

#12 
#13 


2,000 

19,999 

nil 

1 480 


1,000 
nil 
nil 
14,660 


i5,oao 

nil 
2.580 
11.408 . 



On August 10. 500 units of raw material #1, is- 
sued on requisition #17, were returned to store- 
room on returned materials memo #3. The two pro- 
duction orders worked on were: 





Proposed Production 


Date 

Completed 


Production ' 


No. 


Finished Goods 


Units 


Report 


12 
13 




8,000 
6.200 


Auff. 22 
31 


#9 
#10 



The two shipping reports issued were for sales 
made to Other Customers, terms net. 



No. 


Date 


Finished 
Goods #1 


Finished 
Goods #2 


Finished 
Goods #3 




Uni ts 


Price 


Units 


Price 


Units 


Price 


7 
8 


Aug. 2 2 
31 


500 
8.236 


$15.00 
15.00 


2,000 
6.680 


$14.00 
14.00 


4,000' 
nil 


$18.00 
nil 



The follov;ing units were found damaged and 
scrapped: 16 units of raw materials #1 and 40 
units of #2 sold for j|3 cash, and 4 units of 
finished goods #1 and 6 units of #2 sold for 
$25 cash. 

During the month the following bills were ap- 
proved and paid: Rent on factory |500, light and 
heat $20, pov/er |2,000. factory supplies $3 065, 
and tools |l50 . Interest on investment of |650 
was charged to "manufacturing expense" and cred- 
ited to "reserve for interest." Final balances: 
Unexpired insurance $80, factory supplies 4l,900» 
tools llO.OOO, raw materials nothing, goods in 
process nothing, finished goods nothing, reserve 
for depreciation $18,900, accrued taxes $300, 
accounts receivable nothing, vouchers payable 
( "B" Company)- $2,000. Dividend of §250.000 was 
declared and paid. 

A31 



The July wage scales and assignment of work- 
men to the different mc^iines were oontinued. 
#^4cmen were paid every Saturday; office salaries 
of $500 and salesmen's salaries of $700 were paid 



PERIOD 
( Aug , ) 



1-6 



8-13 



16-20 



22-£7 



29-31 



WORKMEN 



l-lOO 
101-200 
201-300 
301-320 

1-100 
101-200 
201-300 
301-320 

1-100 
101-200 
201-300 
301-320 

1-100 
101-200 
201-300 
301-^320 

l-lOO 
101-200 
201-300 
301-520 



JOB 

#12 

4.860' 

4.800 

4,800 

1 , 200 
1,200 
1.200 

2,000 
4,000 
1.000 



JOB 

#13 



3 . 600 
3,600 
3 , 600 

2.400 

700 

3.200 

4,800 
4.800 
4,800 

2,400 
2.400 
2.400 



OVER- 
HEAD 



960 



960 



960 



960 



480 



Starting with the balance sheet as of August 
1, 1921, record the above infornrntion, close the 
books, and prepare financial statements as of 
August 31, 1921. 



PROBLEM 13- A. 

On September 1, 1921, the "X" Manufacturing 
Company decided to Change its accounting method 
from the special order to the product system and 
its basis of overhead distribution from fixed 
jnachine rate to productive labor cost. Machines 
type #1 were designated as department #1. and 

A32 



types #2 and #3 as departments #2 and #3, re- 
spectively. 

The "goods in process - prime cost" and ^" goods 
in process - factory, expense" accounts were dis- 
carded. The budget system of controlling the ex- 
pense accounts v/as also discarded, and an account 
was established for each of the three departments 
each account being operated as shown in Chapter 
XIII. The finished goods journal, the returned 
materials journal, and the requisiti^on journal 
were discarded, the entries formerly made therein 
being recorded in the general journal. 

The "raw material" and "finished goods" subsid- 
iary ledgers were retained, but the "goods in pro<2- 
ess - prime cost" subsidiary ledger v;as supplanted, 
by a "departmental costs" subsidiary ledger of "T" 
ledger accounts. Each department opened a "depart- 
mental costs" subsidiary ledger sheet for each pro- 
duction order. A controlling account entitled 
"component parts" was set up, and a subsidiary led- 
ger for component parts^ such as is shown in Chapter 
XIj was extablished. 

Factory overhead v/as prorated on the basis of 
productive labor cost on the assumption that the 
productive labor for each department and the vari- 
ous elements of factory overhead for the entire 
plant ?/ould be the same in September as it had 
been in August, except that the $86 loss on inven- 
tories v/as disregarded. The ratios for prorating 
overhead to the various departments used in August 
were retained. The percentage figures of the pro- 
ductive labor to be used in charging factory over- 
head to the product were calculated to the nearest 
per c-ent « 

Production orders #14, #15, and #16, issued 
September 1, called for 100,000 units of finished 
goods #lj #2, and #3, -respectively. The material 
received report issued on September 1 was for a pur- 
chase from' "A" Company, terms 2 per cent, 10 days ^ 
(•payment made on September IC?) . 



Material ttI 



Material W 



Material #3 



No 



Purchase 
Or^er 



-w 



Units Price 



Units Price 



g5,0Q0| $.50| 70,QOQr^>ao|eb,OQO| $,25 
,A33 



Units [PriQe 



10 





The six 


raw material 


requisitions issued werfe: 




Date 


Charged to 


Units of Eaw Material 


Ko. 


_Dept. 


Order 


#1 


#2 


#3 


21 


Sept . 1 


#1 


#14 


22,624 


nil 


nil 


22 


1 


H 


#16 


nil 


64,100 


nil 


23 


1 


4-5 


#16. 


nil 


nil 


48,576 


24 


b 


#1 


#16 


356 


nil 


nil 


Z5 


6 


#8 


#14 


nil 


1,980 


nil 


26 


6 


#3 


hri 


nil 


nil 


16.704 



• The three odmponent parts production 
issued were: 


reports 




Dept. 


Order 


Units of ComiDonent Parts 


No. 


#1 


#2 


#3 


1 
2 
3 


?1 

h 


ifl4 
#15 
^16 


3,000 
nil 
nil 


nil 

4,500 

nil 


nil 

nil 

2.000 



The three ooraponen 
were: 


t parts requisitions issued 




^ Gnarled to 


Units of Component Parts 


No. 


Dept. 


Order 


#1 


^2 


#3 


1 
2 
3 


#2 
#3 
#1 


75^14 

#15 
#16 


2,400 
nil 
nil 


nil 

4.000 

nil 


nil 

nil 

1.500 



The three finished goods production reports 
issued were: 





Dept. 


Order 


Units of Finished Goods 


Ro. 


^1 


^2 


#3 


11 

12 
13 


#3 

#1 


#14 
#15 

ne 


1,800 
nil 
nil 


nil 

2,500 

nil 


nil 

nil 
1.000 



The September 30 inventories of goods in 
first and second prooesses of manufacture were. 



Component 
Parts in Process 



j'inished 
Goods in Process 



No, 



Dept. Order Value 



|6,00G 
2,500 
7.000 



No 



D ept, 



T2 
#3 



order Value 



$4,134 
9,720 
4.524 



M. 



#14 

#15 

J16 



The shipping report issued on September 30 
was for a sale to Other Customers, terms 2 per 
cent. 10 days (payment received on September 30), 
A34 



No. 


Finished 
Goods #1 


Finished 
Goods #2 


Finished 
Goods #3 




Units 


Prioe 


Units 


Prioe 


Units 


Prioe 


9 


1,000 


$15.00 


2,000 


Sl4.on 


900 


118.00 



The August wage scales ana assignment of work- 
men to thfi different maohiries were continued. 
Workmen were paid every Saturday; office salaries 
of $500 and salesmen's salaries of $700 were paid 
on September 30. Labor Day was observed as a hol- 
iday. 





WORSEN 


LABOxR HOUR^ 


CHARGEABLE TO 


PERIOU 


ORDER 


ORDER 


ORDER 


OVER- 


(Sept.] 




n4: 


#16 


#16 


HEAD 


1-3 


1-100 
101-200 
201-300 
301-320 


2,400 


2,400 


2,400 


480 


5-10 


1-100 


2,600 




1.600 






101-200 


1,260 


2,760 








201-300 




1,750 


2,250 






301-320 








800 


12-17 


1-100 


3.0Q0 




1,800 






101-200 


1,600 


3,300 








201-300 




2,100 


2,700 






301-320 








960 


19-24 


1-100 


3,000 




1,200 






101-200 


1,600 


3,300 








201-300 




2,100 


2,700 






301-320 








960 


26-30 


1-100 


2,100 




1,500 






101-200 


1,260 


2.750 








201-300 




1.750 


2,250 






301-320 








§00 



During the month the following bills were ap- 
proved and paid: Rent on factory .^500 , light and 
heat |20, power |2,000, factory supplies $3 000, 
and tools |S00. Interest on investment of f650 
was charged to ''manufacturing expense" and cred- 
ited to "reserve for interest." .Final balances; 
Unexpired insurance |60^ factory supplies |2,000, 
tools |10,060, reserve for depreciation $19^660, 
accrued taxes $360. It was estimated that $176 



A3 5 



of the cost of the final inventories v/as due to 
the Gharge for. interest on investment. The hal- 
anoe of "manufacturing expense'' was closed into 
profit and loss . 

Starting with the balance sheet as of Septem- 
ber 1, 1921, record the above information, close 
the booKS, and prepare financial statements as 
of September 50. 1921. 



PHOBLEM 14-A. 

During October, 1921, the "X" Manufacturing 
Company continued the September set of books 
and accounts and the percentages used in prorat- 
ing factory overhead to the different departments. 
All issues of raw materials, component parts, 
and finished goods were charged on the "first in 
first out" principle a 

The raw material received report issued on Oc- 
tober 1 was for a purchase from "B" Gompany, terms 
2 per cent, 10 days (payment made on October 8). 



Material # 1 



Material #2 



Material #5 



No, 



Purch6s< 
Order 



IL 



Units Price 



30,000 



fTBTT 



Units Price 



80,000| |.20|68,Q0q |.25 



Units Price 



11 



uisitions issued v/ere: 



The six raw material rea 



Jnits of Raw Material 



No. 



Date 



Charged to 



Dept. 

#2 
#3 
#1 
#2 
t5 



Order 



n 



22,624 
nil 
nil 
336 

nil 
nil 



f^ 



¥^ 



27 
28 
29 
30 
31 
.32 



Oct, 



/^14- 
#14 
#15 
#16 
#15 
#16 



nil 

1,980 

nil 

nil 

57,690 

nil 



nil 
nil 

17,796 
nil 
nil 

41,792 



The thre 
ports issue 



e component parts production re- 
d were: 





Dept. 


Order 


Unit s 


of Component Parts 


No. 


W" 


n 


#3 


4 
5 
6 


i 

#3 


fl4 

#15 
#16 


4,000 
nil 
nil 


nil 

4,500 

nil 


nil 

nil 

3,374 



A 36 



The three component parts requis: 
were : 


. tions issued 




Charsred to 


Units 


of Component parts 


No. 


Dept. 


Order 


n 


t2 


f5 


4 
5 
6 


n 


fl6 
#14 


nil 
2,600 

nil 


nil 
nil 

4.500 


-L.400 
nil 
nil 



The three finished goods 
issued were : 


produati 


on reports 




Dept. 


Order 


Units of 'Finished Go ode 


No. ■ 


,^1 


,^2 


-3 


14 
15 
16 


#1 


#14 
#15 
#16 


2,200 
nil 
nil 


nil 

2.000 

nil 


nil 

nil 

1,400 

^-^ ? rr-. ! — 



The October 51 inventories of goods in firjt 
and second processes o f n:anuf a o t ar e we r e ; 



IJomponent 
Parts in Process 



Order! Value 



Fini^^hed 
Goods in Process 



No.. 



Pep t , 



§6,000 
2,500 
17 60 



Dept« 



Order 



Velue 



#1 

#3 



^'14 
?15 
rl6 



T2" 

#3 
#1 



#14 
#15 
y^l6 



JL 



1^826 

27 , 149 

4,524 



The shipping report issued on October 51 v/as 
for a sale to Thomas Vvalton, terms 2 per cent, 
10 days .(payment received on October 31 } 



No , 


Finished 
Goods fl 


Finished 
Goods #2 


Finished 
Goods #3 




units 


Price 


Units 


Price 


Units 


Pri e e 


10 


2,000 


$15,00 


2,000 


§14.00 


1,000 


113.00 



During the month the following bills were ap- 
proved and paid: Rent of factory -fSOO, light and 
heat |20, power ^2,000, factory supplies |3,000, 
and tools $t)00. Interest on investment oi $65 
was charged to "manufacturing expense" and cred- 
ited to "reserve for interest." Final balances: 
Unexpired insurance $40, factory suppU'es $2,600, 
tools $10,300, reserve for depreciation |20 EOO, 
accrued taxes $400. It was estim.ated that §22o 
of the cost of the final inventories was due to 
the charge for interest on investment. The bal- 
anoe of "manufacturing expense" was closed into 
profit and loss. 

A37 



The September wage scales and assi^ment of 
workmen to the different machines v/ere continued • 
Workmen were paid every Saturday- office employees 
and salesmen were paid $500 and $700, respective- 
ly on October 31. 





WORKMEN 


LABOR 


HOURS CEARGEABIE TO 


PERI OD 


ORDER 


ORDER 


ORDER 


OVER- 


( Oct.) 




#14 


#15 


#16 


HEAD 


1 


1-100 


600 




200 






101-200 


200 


600 








201-300 




350 


450 






301-320 








160 


3-8 


1-100 


3,000 




1,800 






101-200 


1,750 


3,000 








201-300 




2,100' 


2,700 






301-320 








960 


10-16 


1-100 


3,000 




1,800 






101-200 


1,800 


2,900 








201-300 




2,000 


2,7Q0 






301-320 








960 


17-22 


1-100 


3,000 




1,800 






101-200 


1,800 


3,000 








201-300 




2,100 


2,600 






301-320 








960 


24-29 


1-100 


2,800 




1,200 






101-200 


1,200 


2,950 








201-300 




2,100 


2,100 






301-320 








960 


31 


1-lGO 


600 




200 






101-200 


200 


600 








201-500 




350 


450 






301-320 








160 



Starting with th 
1, 1921, record the 
iDOoks, and. prepare 
tober 31, 1921 • 



e balance sheet as of October 

above information, close the 

financial statements as of Oo- 



PROBLEM 15- A. 



At four A. M. on November 1, 
"broke out in the factory of the 

A38 



1921, a fire 

"X" Manufacturing 



Company and destroyed all the property except the 
cash and accounting "books and records. On Novem- 
ber .5, the accrued payroll as of Novemher 1 was 
paid. On Novemher 10, the insurance company set- 
tled for |lOO,OCrO cash. 

On Novemher 12, 1921, the "X" Manufacturing 
Company purchased from "R" Company a factory 
building for f.50,000 cash and machinery for $66,- 
326.53, terms 2 per cent, 10 days (payment was 
made on November 19). It was decided to install 
a simple-type estimating cost system, such as is 
discussed in Chapter XV, and to discard the gen- 
eral ledger accounts for the different depart- 
ments, for "reserve for interest," and for the 
component parts, and all the factory subsidiary 
ledgers. 

The following schedule of estimated costs was 
used; 



Finished 


Estimated Average Cost per Unit 


Goods 


Total 


Material 


Labor 


Overhead 


fl 
#2 

#3 


$8.49 

8.00 

12.00 


$3.01. 
3.72 
4.17 


$4.52 
3.57 
6.46 


f.96 

.71 

1.37 



On November 16, the workmen returned at the 
September scale of wages, no payment being made 
for the lost time. On November 30, the office 
help and salesmen were paid a. full month's sala- 
ry. The November payroll showed that all the 
worlanen had worked 8 hours a day during the re- 
mainder of the month, except for Thanksgiving 
Day, the assignment of the workmen between pro- 
ductive and non-productive work being the same 
as in September. The workmen were paid each -Sat- 
urday, viz., November 19 and 26. 

Material received report. if 12 showed that on 
November 16 raw materials invoiced at $20,000 
were received on purchase order #10 to "A" Com- 
pany, terms of 2. per cent, 10 days, being taken 
advantage of on November 26. A physical invento*^ 
ry on November 30 showed raw materials on hand 
"valued at both cost and market at f)3,000. 



A39 



During the month the following bills were ap- 
proved and paid: Light and heat $10, po^er |l.- 
600, insurance 1480? factory supplies $3,000, ano 
tools |5,000. Pinal balances : Unexpired insur- 
ance |440, factory supplies $2,000, tools $4,950, 
accrued taxes $450, reserve for depreciation $800. 

Production report #17 showed that during the 
month 1,000 units each of finished goods #1 #2, 
and #3 were completed on production orders #14, 
fl'5, and #16. At the end of the month there were 
1,000 units of each kind of finished goods in th.e 
process of manufacture. It was assumed that the 
average unit of each kind of goods in process 
would cost 50 per cent of its final cost, for raw 
material, and 40 per cent of its final cost for 
both labor and overhead • 

Shipping report #11, dated November 30, showed 
that finished goods costing $24,988 were sold to 
Other Customers for $70,000, which was collected 
subject to a 2 per cent cash discount, A physi- 
cal inventory on November 30 showed finished 
goods on hand valued at cost and market at $3,502. 

Continue the books used during October, subject 
to changes noted above, record the interim trans- 
actions, close the books, and make financial state- 
ments as of ]l^ovember 30, 1921. 



PROBLEM 16-A. 

During December, 1921, the "X" Manufacturing 
Company continued the set of books used during 
November" ( See Problem 15-A) , except that the fac- 
tory was departmentalized according to the three 
kinds of finished goods, viz., finished goods #1 
in process was department #1, Each departmental 
account was operated as shown in Chapter XYI. 
The use of the- November schedule of estimated 
costs was continued. The "materials" and "fin- 
ished goods-" subsidiary ledgers, which were used- 
during October, were reopened. 

A40 



The initial inventories were-: 









Total 


Items 




Units 


Value 


Raw Materials fl 
Raw Materials #2 




2,000 


.$1,000 




5.00Q 


1,000 


Raw Materials #3 




4.000 


1,000 


(xoods in Process - Department 


*^ 


- - 


4,591 


Goods in Process - Department 


P 


- - 


3,275 


Goods in Process - Department 


h 


- - 


4,520 


Finished Goods #1 




200 


1,698 


Finished Goods #2 




200 


1.600 


Fini'shed Goods #3 




17 


204 



The raw material received report issued on De* 
cember 1 was for a purchase from "Z'' Company, 
terms 2 per cent, 10 days {payment made on Decern- 
ber 10) . 



^vlaterlal ^3 



Bo, 



Purchase 
Order 



Material #1 



Uni ts 



13 1 #11 I 20.0001 i. 50 170.0001 S»20 [66. QOd S. 25 
The six raw -material requisitions is suecL //ere: 



Material #2 



Units Price 



jnits i^rice 





Date 


For 
uept. 


Units 


of Raw Materials 


No. 


Ifl 


-^2 


#3 


33 


Dec. 1 


#1 


17,^)84 


nil 


nil 


34 


1 


#1 


nil 


2,660 


nil 


55 


1 


#2 


nil 


nil 


24,040 


36 


1 


y/3 


600 


nil 


nil 


37 


1 


#2 


nil 


66,880 


nil 


38 


1 


#3 


nil 


nil 


42,420 



During Decemoer, the November wage scales and 
the assigrimeilt of woricmen between productive and 
unproductive labor were continued. The office 
employees were paid |500 and the salesmen |700 
.on Saturday. Dec ember 31, 





DI-STHIBUTION OF LABOk HOURS 


Workmen 


Dept, #1 


Dept. #2 


Dept. f3 


Overhead 


1-100 


8,000 




9.750 • 




101-200 


8.000 


13,000 






201-300 




11,500 


7,000 




301-320 








4.160 



Manufacturing expenses were prorated on the 
basis of productive labor cost. Goods in proc- 
A41 



ess final invehtorios were: Department #1 $5,- 
150, department '#2 $4,520, and -department #3 
$5,748. Ihe production report issued was: 





Unita of Finished Goods 


No. 


#1 


#2 


43 


18 


2 ..700 


4.700 


2.020 



The shipping report issued on December 31. was 
for a sale to Other Customers, terms, trade dis- 
Gount 10 per cent: 



No. 


Finished 
Goods #1 


Finished 
Goods #2 


Finished 
Goods 4=^ 




Units 


Price 


Units 


Price 


Uni t s 


Price 


12 


2.000 


$17. 00 


4.000 


^16. 00 


-2,000 


$24.00 



The following hills were approved, and paid: 
Light and heat $50, power $3,000, factory sup- 
plies $4,500 and tools .fl , 000 . Final balances: 
Unexpired insurance $400, factory supplies $3,- 
920, reserve for depreciation $1,600, reserve 
for bad debts $200, tools |5,750, accrued taxes 
$500, accounts receivable |5,000, and vouchers 
payable $2,000. 

Starting with the balance sheet as of Decem- 
ber 1, 1921, record the above information, close 
the boolrs, including all departmental accounts 
after allowing for inventories., and prepare fi- 
nancial statements as of December 31, 1921.. 



A42 



